5 Key differences between an HSA and an FSA

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Key points

• Both HSA and FSA offer a tax-effective way to save on medical bills.
• HSAs are typically more flexible than FSAs, so they’re the best choice for savings you don’t expect to use right away.
• You can use both at the same time if you have access to them.

According to the Peter G. Peterson Foundation, Americans spent more than $4.3 trillion on medical care in 2021, averaging about $12,900 per person. This is one of the highest health care costs per person in the world. A single unexpected bill could amount to thousands of dollars, which is why many prefer to save upfront for healthcare costs.

Two of the most popular ways to do this are by using Health Savings Accounts (HSAs) or flexible spending accounts (FSA). The two accounts have similar names, but have some key differences that affect who can have them and how useful they are. Here are five you need to know about.

1. Eligibility Requirements

FSAs are only available to employees of companies that offer these accounts as a benefit to their employees. If your employer doesn’t have an FSA, you won’t be able to contribute to one.

HSA extension are available to anyone who meets the following criteria:

• Have a high-deductible health insurance plan (one with a deductible of at least $1,500 for an individual or at least $3,000 for a family in 2023)
• They are not claimed as dependent on someone else’s tax return
• They are not eligible for Medicare

Check your health insurance plan if you’re not sure what its deductible is, in order to find out if you’re eligible for an HSA.

2. Account Ownership

FSAs are technically owned by your employer, and you can lose access to this account if you leave your job or are fired. This is one reason why many people don’t like to hide too much money here, especially if they don’t plan to stay with their employer for very long.

You do own your HSA, however, and can continue to contribute to yours as long as you have an eligible health insurance plan. You can use the funds whenever you want, even if you are no longer able to contribute. Additionally, you can choose which bank or company you want to open your HSA with. The best HSA providers allow you to do this invest your funds so your money can grow faster over time.

3. Annual contribution limits

Contribution limits for FSAs and HSAs vary over time. In 2023, you can contribute up to $3,050 to an FSA. HSA contribution limits depend on the type of health insurance plan you have. Those with an individual health insurance plan can contribute up to $3,850 in 2023, while those with a family plan can contribute up to $7,750. And adults 55 and older can add an extra $1,000 to those limits.

In both cases, your contributions are made with pre-tax dollars. This means they reduce your taxable income for the year. This could save you money on taxes versus keeping your medical savings in a savings account. Also, if you use the money for medical bills, you won’t pay any taxes at all.

4. Rollovers

HSAs are the best choice for long-term savings because you can roll over unused funds from one year to the next without any problems. Some people also use these accounts as an alternative to a traditional retirement account because they can leave their savings there and enjoy the tax benefits the account provides for as long as they like.

FSA funds often expire at the end of the year, but this varies by plan. Some employers may allow employees to roll over up to $500 to the next year or give you an additional 2.5 months to use any remaining funds. But they are not legally obligated to provide these options.

5. General flexibility

HSAs are significantly more flexible for most people, which is why they are more popular. In addition to allowing rollovers, these accounts also allow you to make non-medical withdrawals. However, you will pay tax on these, plus a 20% cancellation fee if you are under 65.

But ultimately, it’s up to you to decide which account makes the most sense for you. And you can even use both if you meet the qualification requirements for them. Just remember to be aware of the rules for each one so you don’t get any surprises.

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