HSA vs. FSA: What’s The Difference? | (Full Guide) Inside

Unexpected medical expenses can really take a toll on your personal finances, especially for those on a high-deductible health plan (HDHP). Large out-of-pocket expenses sometimes even prevent people from seeking the medical treatment that they might need. So, how do you prepare for and handle these healthcare expenses as they arise? You might be eligible to participate in a tax-advantaged savings plan that allows you to use your funds for eligible healthcare expenses. The type of plan in which you can participate and the amount you can save in the plan depend on your specific situation. Keep reading as we explain everything you need to know about Flexible Spending Accounts and Health Savings Accounts.

Overview Of Healthcare Spending Accounts

Healthcare costs are on the rise, and you should consider taking advantage of every opportunity available to help with those costs. The Federal government allows you to save tax-free for these expenses under certain conditions. The two most common types of accounts are the Flexible Spending Account (FSA) and Health Savings Account (HSA). Even if you have health insurance, these savings accounts can help offset the costs associated with your healthcare for things not covered by insurance. You might even be able to use the funds for childcare or over the counter medication.

At the very basic level, these accounts are quite similar. They both allow you to save money for qualified medical expenses, and you are not taxed on the money you save in either account. However, they also have many differences such as they way they are funded, who can participate, and what types of expenses will qualify. Keep reading as we dive into the details of each type of account as well as highlight the key differences between the two.

 

What Are HSAs and FSAs?

HSAs and FSAs are accounts recognized by the IRS that allow an individual to save money that can be used for medical costs. The contributions to these accounts are tax-deductible, so you could potentially see a decent tax savings by participating in one of these accounts.

 

  • Health Savings Account (HSA)

You might be wondering, “What is an HSA?” An HSA is a savings plan for those who are covered under a high deductible health plan. These types of health insurance plans require a large deductible to be paid before the insurance plan begins to pay for expenses. In some cases, the deductible may be as large as $6,000 or more per family. By making HSA contributions, you can use your HSA funds to help cover this deductible when you receive treatment.

An HSA may be established by employees or even self-employed individuals covered by an HDHP. If the funds from an HSA are not used during a calendar year, then those funds will usually roll over into the next year. Most people choose to set up automatic payroll deductions to contribute funds to their HSA. This ensures a standard contribution amount so that there is money in the account when the time comes to use it.

 

  • Flexible Spending Account (FSA)

An FSA is managed and owned by your employer, and it cannot be established by a self-employed individual. These accounts are funded through contributions from the employee and/or the employer. The amounts that you contribute are tax-deductible, so those amounts are not considered taxable income for income tax purposes.

FSA contributions are generally considered “use it or lose it” funds. They do not roll over from year to year, although your employer may elect to allow a small rollover of funds or an extended period of time to use the funds. You may choose to use your FSA as a dependent care FSA which allows you to pay for childcare expenses with the funds.

 

Key Differences Between HSA And FSA

Even though the purpose of these accounts is quite similar, there are many differences between an FSA vs HSA. The first difference between an HSA and FSA is the eligibility requirements. The only requirement to participate in an FSA is that your employer must establish it. Once it is established, any employee may participate in the plan. However, to participate in an HSA, an individual must be enrolled in a high deductible health plan. In addition, that person cannot be eligible for Medicare and cannot be claimed as a dependent on someone else’s tax returns.

The annual contribution limits between these two plans are also different. An HSA allows you to save more money than an FSA. In 2021, an individual may contribute up to $3,600 into an HSA for a self-only plan and up to $7,200 for a family coverage plan. On the other hand, FSA contributions max out at $2,750 per individual and $5,500 per household. With an HSA, you can choose to change the amount you contribute to the account at any time during the plan year. However, an FSA is not so flexible. The only time that you can change your contribution amount is during open enrollment or after a qualifying life event.

Ownership of the account and what happens to your funds at the end of the year or if you change jobs is vastly different between an HSA and FSA. With an FSA, you typically lose your funds when you change jobs. Your healthcare FSA account is owned by your employer, so unless you are eligible for health coverage and account continuation through COBRA, then you will lose your funds when you change jobs. However, an HSA belongs to you, and you can carry it with you from one employer to another. Your flex spending account funds do not carryover to the next year, so you lose your unused funds. Conversely, the balance in your HSA can continue to grow from year to year if you do not spend the money.

While there are some differences in eligible expenses between the two, many of them are the same. You can use the money for obvious expenses like copays or medical treatment (similar to items covered under Medicare Part B). You can also use the pretax funds in your account for prescription medication or over the counter medicine in many cases. If properly established and documented, you can use your FSA and HSA account funds to pay for dental expenses or vision care. HSA plans typically come with an HSA card that acts like a debit card and allows you to pay for items directly from the account without the need for a complicated reimbursement process.

 

Comparison of HSA vs FSA
  HSA FSA
Eligibility Enrolled in High Deductible Health Plan (HDHP)

Not eligible for Medicare

Cannot be claimed as dependent by someone else

Employer must set up account
Contribution Limits $3,600 per year for individual

$7,200 per year for family

$2,750 per year for individual

$5,500 per year for family

Carryover Rules Any unused money rolls over to the next year Use it or lose it – unused funds expire at end of year

Employer may elect to allow $500 rollover

Employer may elect to allow additional 2 1/2 months to spend unused funds

Contribution Changes Changes can be made any any time Changes can only be made during open enrollment or after a life event
Account Ownership Owned by individual and can be used at any employer Owned by the employer and cannot be transferred to a new employer.

 

Explanation Of Eligible Healthcare Expenses

HSA-eligible expenses and FSA-eligible expenses are fairly similar, although an FSA sometimes provides more flexibility for certain over the counter expenses. At a basic level, any treatment deemed medically necessary by your doctor will be covered under either plan. Prescription medications will be covered, and many over the counter medicines are covered although you may need a prescription for them to use your HSA funds. Some alternative medical treatments might also be covered, although you might need a letter from your doctor stating that the treatment is medically necessary. Here are a few examples of FSA or HSA eligible expenses.

 

HSA Eligible Expenses

  • Over the counter acne treatments (with prescription)
  • Alcoholism treatment
  • Chiropractic care
  • COVID testing
  • Eye examinations
  • Immunizations
  • Massage therapy (with letter from doctor)

 

FSA Eligible Expenses

  • Over the counter acne treatments (no prescription necessary)
  • Alcoholism treatment
  • Chiropractic care
  • Eye examinations (if established as limited-purpose FSA)
  • Immunizations
  • Massage therapy (no letter from doctor required)
  • Nasal Spray
  • Childcare expenses

The Bottom Line

If you want some help paying for your healthcare and save a few tax dollars at the same time, then consider participating in an HSA or FSA. The type of plan you can participate in depends on your health insurance coverage and your employer. To participate in an HSA, your health insurance must have a minimum deductible, and for an FSA, your employer must sponsor the plan. You can pay for a wide range of expenses with both types of accounts, although you should always be sure to save your receipts and documentation in case the IRS decides to dig a little deeper at tax time.

 

Frequently Asked Questions

Is it better to have an HSA or FSA?

The answer to this question really depends on your personal situation. You typically cannot participate in both plans, so you need to choose the one that works best for you and your family. If you participate in an HDHP, then an HSA might be your best option. Your funds can carry over from year to year, and you get to take them with you if you change employers. In addition, you can also change your contribution amounts at any time. The drawback is losing some flexibility in spending the funds. You might need a prescription or a letter from your doctor to use the funds on some over the counter medications or alternative treatments.

 

Are HSA and FSA eligible expenses the same?

The allowable expenses under both types of plans are very similar. Each plan will pay for doctor office visits, prescription medications, hospital stays, and other obvious medical expenses. However, an HSA is slightly more restrictive when it comes to alternative treatment or over the counter medicines. With an HSA, you will often need a prescription even for over the counter medications for the expense to qualify as eligible. When it comes to alternative treatments, you typically will need a letter from your doctor stating that the treatment is medically necessary. An FSA is generally more flexible for these types of expenses. You can buy over the counter medications like aspirin or acne treatment without a prescription, and it still qualifies as an eligible expense. You can also use FSA funds to pay for childcare expenses if you have designated the account as a childcare FSA.

 

What are the benefits of having an HSA?

An HSA has many benefits. The first benefit is the tax advantage that you will see. Contributions to the account are tax deductible, so your tax bill will be a little lower. Next, you can change your contribution amount at any time during the year. No need to wait until open enrollment or have a qualifying life event. If you change employers, you can take the account with you. The account and money belong to you, so you can carry it to any employer you wish as long as you remain enrolled in a high deductible health plan. Finally, the funds in your account are not lost at the end of the year. Your funds will carry over to the next year, and the balance in your account continues to grow until you spend it.

 

How does a Health Savings Account (HSA) work?

A health savings account works similarly to a regular checking account. In most cases, it even comes with checks and a debit card! You deposit money into the account, and then you use those funds to pay for eligible medical expenses. When you go to the doctor, simply use your HSA debit card to pay for your office visit. If you need to pay for prescription medication, then you can pay for that directly from your HSA account. Since you can only use the funds for qualified expenses, then you need to make sure that you save all your receipts and documentation for items that you have purchased with those funds. The IRS might decide to perform an audit of your expenditures from your HSA account. In that case, you will need to prove that everything you spent from the account was proper. Spending money on items that do not qualify could subject you to withdrawal penalties and additional income taxes. You do not want to end up in that position!

 

What is an FSA eligible expense?

FSA funds can be used to pay for medical items, equipment, and services for you, your spouse, and your dependents. The IRS maintains a full guide detailing what qualifies as an eligible FSA expense. The FSA rules are quite flexible, and you can use these funds to pay for flu shots, immunizations, doctor office visits, prescription eyeglasses, aspirin, acne medication, first aid kits, and many more items. In some cases, you might need a letter from your doctor stating that the expense is medically necessary. For example, you can use the funds to pay for fitness programs if your doctor has deemed a specific program medically necessary for the treatment of a medical condition. Again, be sure to save all this documentation and your receipts for every expense.

 

Can I have both an HSA and FSA?

Generally, no, you cannot have both an HSA and FSA. You might be able to utilize both accounts if you have designated your FSA as a limited-purpose FSA, such as one for childcare expenses. You can, however, utilize an HRA in addition to an HSA or FSA. An HRA is a Health Reimbursement Arrangement that is funded solely by your employer. You can use the funds in this account to reimburse yourself for medical expenses. Often, your employer will fund these accounts with an amount based on your salary or years of service with the company. This is simply a benefit provided by some employers, and the contributions to these accounts are not tax-deductible. While you can use them to pay for certain expenses, the funds cannot be used to pay for your standard health insurance premiums.

Elliot Marks

Elliot Marks

Author & Social Security Advisor

Elliot Marks has spent over 10 years providing clear and concise information to help Americans navigate the complex nuances of social security and many other government services in the United States. Elliot has a passion for helping those in need of these services to be able to find timely access to news and information that is relevant and helpful to their daily lives.