FSA (Flexible Spending Account) and HSA (Health Savings Account) are tax-advantaged accounts for healthcare expenses but they differ in terms of who is eligible, who owns the funds, whether funds are portable or roll over, contribution limits, and eligible expenses. HSAs have higher contribution limits and funds not spent in a given year roll over to the next year, but an HSA is only available to members enrolled in a high-deductible health plan (HDHP).
Eligibility for FSAs is set by employers and usually all employees — whether they participate in a health plan or not — are eligible for an FSA, but unspent and unclaimed funds are forfeited (with some exceptions). You continue to own money in the HSA even if you change health plans or terminate employment; however, you lose funds in an FSA when you terminate employment.
What is FSA?
FSA stands for Flexible Spending Account. It allows an employee to set aside a portion of their salary to pay for qualified expenses such as medical or dependent care. Distribution of funds from an FSA is not taxed. It is owned by the employer and any unused/unclaimed amount is lost.
What is HSA?
HSA stands for Health Savings Account. It is a funded by individuals using pre-tax income and is available to those who are enrolled in high-deductible health plans. Distribution of funds from an HSA is not taxed if used for medical expenses. Funds are owned by the individual, are carried over from year to year, and are not forfeited when the individual changes employers or health plans.
This video compares the benefits and disadvantages of FSA to those of HSA:
Eligibility for an FSA is set by the employer and employers have complete flexibility to offer various combinations of benefits in designing their plan. For example, those with high-deductible plans may be limited to “limited purpose” FSAs used for dental, vision and other non-medical expenses. Employees can participate in an FSA even if they are not covered by any employer-sponsored health plan. Self-employed persons are not eligible for an FSA.
Individuals are eligible for a HSA if they have a high deductible health plan (HDHP). In 2015, this means a plan with a deductible of at least $1,350 for individuals or a family deductible of at least $2,600. The individual must not be covered by other non HDHP-health insurance or Medicare, and cannot be a dependent on another’s tax return.
Is a high deductible plan worth it?
The deductible can be paid out of the HSA, which essentially means paying for medical expenses with tax-free income. And high deductible plans usually provide much better coverage (lower copays and coinsurance) after the deductible is met. So high-deductible plans are a good choice for families that anticipate either little to no medical expenses, or sometimes for families that need a lot of medical services during the year.
Limits on FSA contributions are set by the employer. Starting 2013, the annual limit will be capped at $2,500 for employee contributions made via salary deductions. This $2,500 limit does not apply to non-elective contributions made by the employer — sometimes called flex credits. The limit remains unchanged for 2015.
In 2015, the annual contribution limit to an HSA is $3,350 for individual coverage and $6,650 for families. People over 55 years of age, and those turning 55 in the calendar year, can make an additional "catch up" contribution of $1,000. These limits apply to the combined contribution from the employee and the employer.
Account Ownership and Portability
An FSA account is owned by the employer. An HSA account is owned by the individual. This means when the individual terminates employment, unused funds in an FSA are forfeited. However, unused funds in an HSA continue to be owned by the individual. Distributions from an HSA can be made tax-free if used for medical expenses while enrolled in a high-deductible plan. In other cases, distributions can still be made from an HSA but are subject to income taxes and a 10% penalty.
Some employers structure their FSA so that the entire annual contribution amount can be accessed at any time (e.g., in January), even if it has not all been paid in yet. However, any money in an FSA that hasn’t been spent by the end of the year is lost and returned to the company. If, however, you leave the company and have spent more than has been paid in so far that year, you do not have to pay it back.
In HSAs, you can only access money that has already been deposited, but unused funds stay in the account indefinitely.
Changes to contributions
HSA contributions can be changed on a monthly basis.
Rollover of unused funds
With an HSA, the funds are owned by the employee and they rollover i.e., funds contributed but not used in 2015 can be used for medical expenses in 2016 or in any year in the future.
The rules for FSAs are a little more complicated. Originally, FSAs were "use it or lose it" funds. If the funds contributed in 2014 are not used in 2014, employees lose access to them. There was one exception, though. Employers could choose to offer a two-and-a-half month grace period in the following year to use the funds i.e., you have until March 2015 to use your 2014 FSA funds. Starting 2014, the IRS changed its rules to also allow a limited rollover option. Employers can now allow their employees either the two-and-a-half month grace period in the following year to use all unused FSA funds, or the option to roll over up to $500 from the prior year's balance.
Note that this is a decision the plan takes up front. Employees do not have the option to choose one or the other at the end of the year. So it is advisable to understand the employer's plan before choosing FSA contribution amounts during open enrollment.
There is considerable overlap in the eligible expenses for FSA and HSA accounts. These include:
- Expenses eligible under the medical or prescription drug plan, such as deductibles or coinsurance
- Medical supplies such as braces or first aid supplies
- Vision and dental expenses for you or your tax qualified dependents
- Preventative care such as annual physicals, immunizations, well-baby programs, mammograms, Pap tests and other cancer screenings, as well as non-medical expenses such as dental, orthodontics and vision.
COBRA & Medicare premiums are qualified expenses for an HSA but not eligible expenses for an FSA. Another advantage for HSAs is that you can use the HSA to pay for qualified health expenses for tax-qualified spouse or dependents, even if they are not covered under your high-deductible health plan. However, a disadvantage is that an HSA cannot be used to cover expenses for a domestic partner while an FSA usually is (depending upon how the employer has set it up).
Until 2012, over the counter medication and contraceptives were qualified expenses under FSA. However, a prescription is now required for any medication (other than insulin) to qualify as an FSA expense.
FSAs do not gain interest, while HSAs do.
FSA contributions are made on a pre-tax basis via salary deductions. This means the contribution made to an FSA is not subject to income tax.
How to Choose
An individual cannot use both an FSA and a HSA. Those who receive Medicare or do not have a high-deductible health plan cannot contribute to a HSA but can contribute to an FSA. However, you can only open an FSA if it is offered by your employer. Those who are young and single may prefer a HSA to an FSA, as unused contributions do not expire at the end of the year or if the individual changes jobs, allowing them to save up a large amount over their lifetime. Those who have fairly consistent medical costs through the year, or who may need to use money from the scheme early in the year, may prefer FSAs.