What's the difference between HSA and FSA accounts?

Updated on: 2022-11-02 - 3 mins read

A health savings account and flexible healthcare spending can help you pay fewer taxes and save money on medical, dental, vision, and other qualified medical expenses. Even though they have some things in common, each has its features and benefits. Here's what you need to know about an FSA and an HSA. Find out how to decide which one might work best for you and how to do that.

Flexible Spending Amount (FSA)

An FSA is a great way to save money on taxes and pay for out-of-pocket health care costs that qualify. It's an account set up by your employer that lets you save tax-free money for yourself, your spouse, or your dependents.

First, since you can only get an FSA through your employer, your FSA account belongs to your employer. If you quit your job, you would lose the money in your FSA. You can put up to $2,850 into a healthcare FSA for 2022, and your employer may also put money in on your behalf. But the IRS does not require that of your employer.

Benefits of FSA

One of the best things about an FSA is that you can use your money as soon as you sign up. For example, if you decide on January 1 to put away $2,400 a year by putting away $200 a month before taxes, you'll be able to access the whole $2,400 at the beginning of the year. It means that even if your FSA account doesn't have enough money to cover a $1,500 qualified medical expense, your FSA administrator will still pay the whole claim.

Even though that's good news, there are some negative things about an FSA.

Disadvantages of FSA

Most FSA accounts have a "use it or lose it" rule, which means you have to spend all of your FSA money by the end of the plan's year or lose it. It is the biggest drawback. You must do so to ensure you'll retain your FSA funds. Some employers can choose between two options that can give them more freedom with funds that aren't used. A more extended grace period or a rollover provision are two of these features.

An extended grace period gives you two and a half more months to use your FSA money. If your employer has this feature, you'll have until March 15, next year, to spend your FSA funds. This deadline may differ if your employer's plan doesn't follow a calendar year. Instead, you will have two and a half more months after the end of the plan's year.

Health Savings Account (HSA)

One can make pre-tax contributions to an HSA in the same way as they are to an FSA. However, in contrast to an FSA, one must meet the following criteria to contribute to an HSA:

  • No one lists you as a dependent on their taxes.
  • There is no record of your Medicare enrolment.
  • Your health insurance is an HDHP or high-deductible health plan (HDHP).

The term "high deductible health plan" (HDHP) refers to any health insurance policy with a sizable out-of-pocket expense requirement. The minimum deductible for an HDHP in 2022 is $1,400 for an individual and $2,800 for a family. Your HSA is your account, unlike an FSA; you own it and can take it with you if you change jobs or leave your current employer.

You can also set up an HSA on your own or with the help of your employer. Contributions to an HSA account provided by an employer are exempt from both payroll and income taxation. However, if you open a Health Savings Account (HSA), you can deduct the money you put into it from your federal income tax. You are eligible for the deduction if you choose to itemize your deductions.

But remember that the IRS limits how much you can put into an HSA.

HSA Contribution Limits

A maximum of $3,650 can be invested in 2022 if the HSA covers just you. You can support a maximum of $7,300 if the HSA protects you and your family. Both employee and employer contributions are capped at the levels stated.

According to the Internal Revenue Service, the HSA contribution period is longer than the FSA contribution period. Until the date that your tax return is due, either you or your employer can contribute to your retirement plan. For the tax year 2022, you have until the federal tax return deadline of April 18, 2023, to make contributions to your HSA.

An HSA is unlike a flexible spending account (FSA), which limits how and when you can use your money and how much you can rollover. If you don't spend all of your allotted funds before the plan year's end, don't worry; they will be carried over for usage next year. Every year, you can carry over your HSA balance without penalty.

Difference between HSA and FSA

The minimum balance needed to invest your HSA money varies from employer to employer but is typical for most HSA plans. Depending on your HSA plan, you can invest in various securities like stocks and bonds. Your HSA account funds grow tax-free, and disbursements used to pay for eligible medical expenses are also not subject to taxation.

Withdrawals from health savings accounts (HSAs) are taxed at a higher rate of 20% if they aren't used to pay for medically necessary expenses. Any distributions not used for medical expenditures must be reported on IRS Form 8889 and filed with your federal income tax return. There are, however, a few cases where this is different. If you are over 65, have a disability, or the distribution was made because of the HSA owner's death, the IRS will not impose the extra penalty.

We've laid out the key differences below to help you understand the differences between FSAs and HSAs.

Contribution LimitsYou can put up to $2,850 into a health care FSA in 2022.One can put in as much as $3,650 for an individual plan and $7,300 for a family plan in 2022. Employee and employer contributions are both subject to caps. Those who are 50 and up are eligible to make a supplemental contribution of up to $1,000.
Rollover Limits and Grace PeriodsUnless your employer has chosen to allow a rollover or an extended grace period, you will lose the money in your FSA if you don't use it within a specific time frame. The maximum annual rollover allowed by the IRS is $570. You may be able to use your FSA funds for up to an extra 2.5 months after the end of the year if the period is extended.If you have HSA funds, you can use them whenever you like. Any money left over at the end of the year is carried over. Once a year, you can transfer your health savings account balance to a new HSA provider.
QualificationsIf your company offers a flexible spending account (FSA), you may be eligible to participate.Independently or via your employer, you can open a health savings account. To be eligible, you must have a health insurance plan with a high deductible.
Account OwnerThe company you work for retains ownership of your FSA.If you decide to leave your current employer, you won't have to worry about losing access to the money in your HSA because you own the account, and it's portable.
Key Tax BenefitsContributions to a flexible spending account (FSA) are exempt from federal payroll and income taxes. Getting money out to pay for necessary medical bills is tax-free.When put into a health savings account, contributions are tax deductible and exempt from taxation. Taxes are not applied to distributions used to pay for medically necessary expenses. If you don't utilize your HSA distribution on medical costs, though, you'll owe a 20% tax.

Tips for choosing the right option for you

Although both FSAs and HSAs can help you save money on tax-deductible medical expenses, it's essential to take the time to choose the account that's right for you. In particular, consider the following points before making your final decision:

  • Do I have the option of opening a flexible spending or health savings account through my company?
  • How much do I anticipate spending on necessary medical care for myself, my dependents, or my spouse this year?
  • Do I need an independent, non-work-related account?
  • Can I open an HSA if I have this health insurance plan?
  • Should I put money aside to invest in it and let it grow?

These are just some factors to consider when deciding between an FSA and an HSA. FSAs offer less leeway than HSAs do. You can only open an FSA through your workplace; the funds aren't transferable if you leave your job or the company that sponsors the FSA.

With an HSA, you have more leeway because your money can accumulate tax-free investments and roll over yearly. You can even take it with you if you change jobs. You should compare the two plans to see which one meets your medical needs and for which you qualify.

To conclude, you can use either a health care FSA or an HSA to cover non-insurance medical costs that are tax deductible. A health care FSA directly decreases your taxable income and payroll taxes because contributions are made before taxes are taken. An HSA might help cover medical costs when paired with a high-deductible health plan from your employer. The money in your HSA can be invested, carried over from year to year, and is entirely yours if you ever decide to quit your current employment.