What Is FSA and HSA? What is the Difference and What is Each Used For?
If you are evaluating health insurance plans, FSA and HSA are terms you are bound to come across frequently. Both flexible spending accounts (FSAs) and health savings accounts (HSAs) can be thought of as personal savings accounts, except for one limitation. The funds in these accounts can only be spent on qualifying medical costs. These accounts can also reduce your taxable income since you can save pre-tax dollars in both. But really, what is FSA and HSA?
Educating yourself on what each account is and what the difference is between an FSA and HSA can help you see which one will work best for your needs and what you should choose.
What is FSA?
An FSA is an account that employees can only get with the help of their employers. It can serve as a source of fund for out-of-pocket medical costs.
If someone asks about what is FSA and HSA and how they differ from each other, one of the biggest answers is that only those employed can sign up for an FSA. If you’re self-employed, you’re automatically disqualified from using this account. Fortunately, this account works regardless of the health insurance you have.
The government has set a contribution limit of $2,750 to FSAs for 2020. You will continue to have access to your FSA funds only if you remain working for the same employer. But if you leave even before the year ends, the rest of the money will be forfeited.
It is up to employees to choose the contribution they can afford for their FSA and do so only at the open enrollment for employees. If you’ve decided to have an FSA, you can start using its full amount even if the year has just started, and you have not set aside contributions in your account. Take note, though, that if you decide to stop working, you will have to refund the amount you’ve used if it has exceeded the contribution you’ve made to your FSA account.
For those asking what is FSA and HSA and are curious about carryovers, the former doesn’t have one, except if your employer decides otherwise. Employers may offer two options. First, you can use up your FSA funds up to 2.5 months after the year ends. Second, you can rollover $500 at most from your unused FSA funds to the following year, as set by the IRS.
What is HSA?
An HSA can cover medical expenses right out of pocket. Both employed and self-employed people can use this account, provided they have signed up for a high deductible health plan (HDHP).
HDHPs have lower premiums but you have to deal with high deductibles. As required, an HDHP holder should pay a minimum deductible of $1,400 for individuals or $2,800 for family plans. The annual limit is also set at $6,900 for individual coverage and $13,800 for family coverage.
So what is FSA and HSA in terms of who owns the account? The answer is, with an HSA, the account holder alone is the owner. Wherever you go, your HSA goes with you because it is your account, not your employer’s. This HSA fund also continues to grow and gets rolled over the next year if left unused. The accumulated account can be used for qualifying medical expenses when needed, even in retirement.
HSA funds can be withdrawn via a debit card, or they can be used to reimburse you after you’ve paid for the eligible medical expense.
How does HSA compare to FSA?
To have a better understanding of the answer to the question, “what is FSA and HSA and how different are they from each other?” this comparison based on six defining points should help:
- Eligibility. Anyone with an HDHP can qualify for an HSA, while only those employed can have an FSA.
- Contribution. HSAs set higher contribution limits. These may even increase two-fold for family coverage. On the other hand, FSAs have lower contribution limits.
- Changes to the contribution limit. HSAs allow account holders to change their contribution limits anytime throughout the year. However, FSAs only allow for the setting of the contribution during the open enrollment, when switching employers, or during a change in family status.
- Employer ties. HSAs are not connected to any employer, and you can even be self-employed to use it. FSAs, on the other hand, are owned by employers, so you will lose the account if you leave your current employment unless COBRA allows for continued eligibility.
- Rollover. The remaining funds in HSAs can be rolled over into next year. On the other hand, unused money from FSAs gets forfeited, except when the employer allows otherwise with a maximum limit of $500.
- Impact on taxes. Contributions made to HSAs are tax-deductible or pre-tax, with distributions and earnings remaining tax-free as well. FSA contributions are also pre-tax with distributions considered tax-free, too.
How to choose
Now that you know the difference between FSA and HSA you should be able to decide which is most suited for you. The choice, though, may mainly depend on your employment and insurance deductible.
To choose an insurance plan, make sure to ask if your health insurance plan is eligible for HSA. You should also ask if your employer providers FSA.
But if you really need to choose an account, an HSA with an HDHP would be an excellent choice for young and generally healthy people without medical conditions or limited prescriptions. HSAs also allow you to accumulate your funds over time.
Knowing what is FSA and HSA and how the two accounts differ from each is already a good start in your research to find what option is best for you. Compare the two while assessing your current situation, and you’ll get the answer.