What is the benefit of using a health savings account HSA or flexible savings account FSA )? *?

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) both help you reduce your taxable income by putting money away for healthcare expenses. However, there are some major differences between the two.

Generally speaking, an FSA allows you to elect at the beginning of a plan year the total that you want to set aside from your pay for the whole plan year to spend on IRS-qualified healthcare expenses. The tax-exempt funds are saved and spent on a year-by-year basis. This is why they are referred to as “use-it-or-lose-it” accounts. FSAs are great for saving funds you know you’ll use by the end of the plan year.

An HSA is also to be used for IRS-qualified healthcare expenses, but it is a longer-term account. HSAs are available to anyone covered by an IRS-qualified high deductible health plan (HDHP). As long as you are covered by an HDHP, you can contribute to your HSA throughout the year in whatever increments you choose, up to an annual maximum.

The HSA funds stay with you, even if you leave the HDHP plan, until you spend them – including through retirement. And after age 65, you can use the funds for anything at all. You won’t pay tax on IRS-eligible healthcare expenses, but any other expenses will be taxed as income.

A few more differences:

• FSAs are employer-sponsored plans, and HSAs are owned by you. Therefore, when you change employers, you can take the HSA with you, but any funds contributed to your FSA generally must be spent.
• You can open an HSA even if it isn’t offered by your employer. You’re allowed to contribute to an HSA as long as you have an HSA-eligible health insurance policy.
• HSAs are not “use it or lose it.” Unspent funds remain in an HSA, year after year through retirement. With FSAs, you must spend the money by the end of the year (or carryover period, if offered by your employer).
• You can change your regular contribution amounts to your HSA at any time throughout the year if you decide you need to put away more or less. FSA contributions are set at the beginning of the plan year and cannot be altered except in cases of a qualifying event.
• You can invest HSA funds. You can keep a minimum amount in the cash account and then invest the rest in mutual funds to grow over the long term.
• With HSAs, you have an unlimited amount of time to reimburse yourself. You can withdraw the money for eligible expenses at any time. With FSAs, you must submit receipts by a deadline in order to substantiate the expenses as eligible per IRS requirements.

Your healthcare needs and insurance plan will help determine whether an HSA or FSA is the best fit for you. You may even be suited for both, in which case the FSA would be a “limited purpose” FSA for specific needs like dental, vision or dependent care. You can learn more about HSAs in the video below.

Ferne Emery is an account manager with Pinnacle's Health & Benefits team. She is located at Pinnacle's Premier office in High Point, NC, and can be reached by phone at (336) 881-3209 or by email at [email protected]. 

A health savings account, or HSA, and a flexible spending account (or FSA, also called a flexible spending arrangement by the IRS) are both tax-advantaged accounts that allow you to save specifically for medical costs. Aside from that, there are several key differences between HSAs and FSAs.

What are HSAs and FSAs?

Both HSAs and FSAs allow people with health insurance to set aside money for health care costs referred to by the IRS as qualified medical expenses. These include medical care, prescription drugs, dental and vision care, over-the-counter medications and other health-related items. In many cases, you receive a debit card for your account and can use it to pay for qualifying expenses. Both types of accounts have tax benefits, but there are some differences to be aware of.

What to know about HSAs

Health savings accounts are not typical savings accounts, and they’re available only to people who have a high-deductible health plan, or HDHP. In 2022, an HDHP is any plan with a deductible of at least $1,400 for an individual or $2,800 for a family, with maximum out-of-pocket spending at $7,050 and $14,100, respectively. Here are the important points:

There's a contribution limit.

In 2022, people with individual health insurance can save up to $3,650 to an HSA, and people with family coverage can save up to $7,300.

Contributions are pretax or tax-deductible.

If you’re considering opening an HSA with a private insurance plan, you can deduct the year’s contributions from your taxes when you file. If your employer offers an HSA, you can fund it pretax from your paycheck or you can make tax-deductible contributions.

HSA funds can be invested — and roll over year to year.

If your HSA custodian allows it, your funds can be invested. If you don’t spend the money on medical costs right away, the balance can grow tax-free. The balance in an HSA also rolls over year to year, so you can save to the account now and use it for medical expenses in the future, even after you no longer have an HDHP.

You must qualify for an HSA.

To contribute to an HSA, an HDHP must be your only health insurance plan, you must not be eligible for Medicare and you can't be claimed as a dependent on someone else’s tax return. Not all plans with high deductibles qualify for HSAs, so it’s important to check with the insurer that the plan is “HSA-eligible” before you buy.

The money you use for eligible medical expenses is tax-free.

When you withdraw funds for qualified medical expenses, you don’t pay taxes on the money. If you use the money for other expenses, you’ll owe income taxes on the distribution and will be required to pay a penalty tax. Once you enroll in Medicare, you may no longer contribute to the HSA but can withdraw from it for other expenses without the penalty tax.

Your employer can contribute.

Like a 401(k) plan, your employer can contribute toward your HSA, and about eight out of 10 employers offer this benefit. This can help you cover the higher deductible if you have medical costs, or it can be saved for future expenses. The employer contribution counts toward your annual contribution cap.

What to know about FSAs

Flexible spending accounts come only as part of a benefits package from an employer — you can't get one on your own — but the medical expenses you can use them for are the same as HSAs. Here's what you should know:

Like HSAs, there’s a limit on FSA savings.

In 2022, you can contribute up to $2,850 to an FSA, and your spouse can also contribute up to $2,850 to their FSA if their employer offers one.

The money is use it or lose it — sometimes.

FSA money can be “use or lose,” meaning you lose any amount you haven’t spent at the end of the year unless your employer has selected a rollover option or opted for a grace period. If your employer opts in, they can let you carry over up to $570 in 2022, or they can offer a grace period of 2½ months to spend leftover funds.

The money is pretax and available upfront.

The money in an FSA comes out of your paycheck before taxes, in regular increments, but these accounts are generally “pre-funded.” In other words, though you haven’t paid in yet, the full contribution amount you selected during open enrollment is available to spend at the beginning of the year.

Employers can contribute, but most don’t.

Although employers can contribute to health FSAs, it’s unusual for them to do so. Only about 5% of workers received employer FSA contributions in 2019, according to the Employee Benefit Research Institute. Unlike an HSA contribution, employer contributions to health FSAs don't count toward the annual contribution cap.

In general, electing to sign up for an HSA or FSA is a good financial move. Knowing which one to select and how to get the most out of it will take some education.

Important differences between HSAs and FSAs

Health savings account (HSA)

Flexible spending account (FSA)

You probably can’t have both an HSA and an FSA

If you qualify for an HSA, you can't elect to set up both an HSA and an FSA, unless the FSA is a “limited-purpose” FSA. Your employer’s HR representative will be able to tell you if this is the case.

A limited-purpose FSA works like a regular FSA but can be used only for things not covered under your main health insurance policy, such as vision care and dental expenses. If you expect to have high medical costs throughout the year or want to maximize contributions to your HSA while minimizing your withdrawals, using a limited-purpose FSA for expected vision and dental expenses could be a smart choice.

Should you choose an HSA or an FSA?

Both accounts have benefits that can make managing your out-of-pocket medical expenses easier throughout the year.

In general, healthier and younger people with few prescriptions or medical conditions are likely to do better with an HSA and HDHP, since they're not seeking frequent medical care or paying for regular medications.

Even though HDHPs are some of the cheapest health plans available, the trade-off is high out-of-pocket limits — as much as $14,100 for a family in 2022. If you had high medical costs, you’d still have a significant amount to pay out of pocket, even if you contributed the maximum to your HSA.

Other health plans cost more per month but cover more costs upfront. For that reason, folks with high medical costs can often find savings with a more generous plan than an HDHP, disqualifying the HSA as an option.

It's worth doing the math on any plans you're comparing: Calculate how much you'd expect to pay for both plans in yearly premiums, deductibles and out-of-pocket costs, factoring in any employer contributions.

While FSAs offer less flexibility than HSAs, an FSA will still help you save money, and can be paired with any plan — if your employer offers it.

A good guideline as you begin thinking about how much to contribute: Start with enough to cover your deductible, expected medication costs, typical over-the-counter pharmacy spending and anticipated doctor’s visits.

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