Health Savings Accounts (HSAs) vs. Flexible Spending Accounts (FSAs): Key Differences

What Is an HSA?

A Health Savings Account (HSA) is a tax-advantaged savings account designed for individuals with high-deductible health plans (HDHPs). It allows you to save and invest money for qualified medical expenses while enjoying triple tax benefits:

• Contributions are tax-deductible or pre-tax if made through payroll.
• Growth is tax-free.
• Withdrawals for eligible expenses are tax-free.

HSAs are portable, meaning the account stays with you even if you change jobs or health plans. They also offer long-term savings potential, as unused funds roll over year after year and can be invested in stocks, bonds, or mutual funds.

What Is an FSA?

A Flexible Spending Account (FSA) is an employer-sponsored account that lets you set aside pre-tax dollars to pay for qualified medical expenses. FSAs are more restrictive than HSAs in several ways:

• Funds must be used within the plan year (though some plans offer a grace period or allow a small rollover amount).
• Contributions are forfeited if not spent by the deadline.
• FSAs are tied to your employer, so you lose access to the account if you leave your job.

Despite these limitations, FSAs are a convenient way to save on predictable healthcare expenses, such as copays, prescription drugs, and medical supplies.

Key Differences Between HSAs and FSAs

Eligibility Requirements

• HSA: You must be enrolled in a high-deductible health plan (HDHP) to qualify. In 2024, an HDHP is defined as a plan with a minimum deductible of $1,600 for individuals or $3,200 for families.
• FSA: Available to employees whose employers offer the account. No specific health plan is required, but FSAs are only accessible through your job.

Contribution Limits

• HSA: In 2024, the contribution limit is $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those aged 55 and older.
• FSA: The contribution limit for FSAs in 2024 is $3,050 per individual, and this amount does not vary based on family status.

Rollover Rules

• HSA: Funds roll over year after year with no expiration, making it a powerful tool for long-term savings.
• FSA: Unused funds typically do not roll over, but employers may offer a grace period of up to 2.5 months to use remaining funds or allow a rollover of up to $610.

Tax Advantages

Both HSAs and FSAs offer tax benefits, but HSAs provide greater flexibility:

• HSA: Triple tax benefits (tax-deductible contributions, tax-free growth, and tax-free withdrawals).
• FSA: Contributions are pre-tax, reducing your taxable income, but there’s no opportunity for investment growth.

Portability

• HSA: Completely portable. The account belongs to you and remains active even if you change jobs or health plans.
• FSA: Tied to your employer. You lose access to the funds if you leave your job, unless you qualify for COBRA continuation coverage.

Investment Options

• HSA: Funds can be invested in a variety of options like mutual funds, stocks, and bonds, allowing for long-term growth.
• FSA: Funds cannot be invested. They are meant solely for immediate or short-term medical expenses.

Qualified Expenses

Both accounts cover a wide range of medical expenses, including:

• Doctor visits and copays
• Prescription medications
• Dental and vision care
• Over-the-counter medications and medical supplies

However, the list of eligible expenses is determined by the IRS and applies to both accounts.

Spending Flexibility

• HSA: You can save funds indefinitely, even for retirement healthcare costs. After age 65, HSA funds can be withdrawn for non-medical expenses without a penalty (though they will be taxed).
• FSA: Funds must be used within the plan year or grace period, making it less flexible for long-term savings.

Which One Is Right for You?

Choosing between an HSA and an FSA depends on your healthcare needs, financial goals, and employment situation.

Choose an HSA If:

• You have a high-deductible health plan (HDHP).
• You want to save for both current and future medical expenses.
• You prefer long-term savings with investment opportunities.
• You value portability and flexibility.

Choose an FSA If:

• Your employer offers an FSA, and you don’t have an HDHP.
• You have predictable, recurring medical expenses, such as copays or prescriptions.
• You don’t need long-term savings but want to reduce taxable income.
• You’re comfortable using the funds within the plan year.

Using Both Accounts

In some cases, you may be able to use both an HSA and a limited-purpose FSA, which is restricted to covering dental and vision expenses. This strategy can maximize your tax savings while allowing you to reserve your HSA funds for long-term growth. Check with your employer to see if this option is available.

Conclusion

Both HSAs and FSAs are valuable tools for managing healthcare costs, but they serve different purposes. HSAs offer unmatched flexibility and long-term savings potential, making them ideal for those with HDHPs. FSAs, on the other hand, are great for employees looking to save on immediate medical expenses. By understanding the key differences between these accounts, you can choose the one that best aligns with your financial goals and healthcare needs.

For more information, visit:

• IRS – Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans
• HealthCare.gov – Health Savings Account (HSA)
• FSAFEDS – Flexible Spending Account Information