So what is the difference between a FSA and a HSA? In this article we’ll define each account, highlight their advantages and disadvantages, and compare them.
What is a Flexible Spending Account (FSA)?
An FSA is a savings account that enables employees to allocate money for healthcare expenses on a tax-free basis. You can use the funds towards medical expenses for yourself, your spouse or dependents. You can only create an FSA with your employer, and your employer effectively owns the FSA account. If you leave your job, you forfeit any remaining FSA funds.
For 2022, the maximum you can contribute to a FSA is $2,850 (up from $2,750 in 2021). While an employer may also contribute on your behalf, the IRS does not require them to do so.
Advantages of an FSA
Funds are immediately made available the day you enroll. For example, if you decide on January 1 to contribute $2,400 annually with monthly pretax contributions of $200, you will have access to the entire $2,400 at the start of the year. This means if you have a qualified medical expense of $1,500 but your FSA account does not have the entire funds to cover it, your FSA administrator will still pay the entire claim.
Disadvantages of an FSA
The primary disadvantage is that, typically, most FSA accounts have a “use it or lose it” feature, which means you need to spend all of your FSA funds before the end of the plan’s year. If you fail to do so, you will forfeit your FSA funds. Some employers may elect one of two features that can provide some flexibility with unused funds. These features include an extended grace period or a rollover provision.
Many employers have an extended grace period allows you an additional 2.5 months to spend your FSA funds. If your employer’s administrator plan operates on a calendar year basis, you will have until March 15 of the following year to spend your FSA funds. If your employer’s administrator plan does not follow a calendar year, you will have an additional 2.5 months following the plan’s year-end date.
What is a Health Savings Account (HSA)?
Similar to an FSA, an HSA also allows you to put money away into a pretax account but works a bit differently. To contribute to an HAS, you must qualify and meet the following requirements:
- You are not claimed as a dependent on anyone else’s tax return.
- You are not enrolled in Medicare.
- You are covered under a high deductible health plan (HDHP).
An HDHP is any healthcare insurance plan with a high deductible amount. For 2022, the minimum deductible amount for an individual HDHP is $1,500 and $3,000 for a family plan. Unlike an FSA, you own your HSA account. That means that if you leave your employer, you can take your HSA funds with you.
You can also establish an HSA either independently or with your employer. If you have an employer-sponsored HSA account, the amounts you contribute are not subject to payroll or income taxes.
If you set up your HSA account on your own, you can deduct your HSA contributions on your federal income tax return. You qualify for the tax deduction whether you elect to itemize your deductions or not.
Maximum contribution amounts for 2022 are $3,650 for self-only and $7,300 for families. If you are age 55+ by the end of the year, you can contribute an additional $1,000 to your HSA. If you are married, and both of you are age 55+, each of you can contribute an additional $1,000.
These limits include both employee and employer contributions. The IRS allows you more time to contribute to an HSA account than an FSA account. You or your employer can contribute in the current plan year or up to the due date of your tax return. For example, you can make 2022 HSA contributions until April 15, 2023, which is the tax deadline for your federal tax return.
Unlike FSAs, where you have a restriction on the time you can use your funds or a limited amount to roll over, an HSA is different. In the event you do not use your funds before the end of your plan year, you will not lose them. Your unused HSA funds are eligible to roll over each year without any restrictions.
Investing and Using HSA Funds
Another key difference between an FSA and an HSA is the ability to invest your HSA funds. Most HSA plans require a minimum balance to invest your HSA funds, which varies from employer to employer. Your HSA plan may offer different investment options, which may include stocks or bonds. Funds within your HSA account grow tax-free, therefore you do not have to pay taxes on your distributions if you use them for qualified medical expenses.
If you do not use your HSA funds for qualified medical expenses, it is subject to an additional tax of 20%. You are required to report any distributions not used for medical expenses on Form 8889 with your federal income tax return. However, there are a few exceptions to this rule. The IRS will not assess the additional penalty if you are 65 years of age, disabled or the distribution is made due to the death of the HSA holder.
Key Differences Between an HSA and FSA
While a healthcare flexible spending account and a health savings account both allow you to set up tax-advantaged savings to pay for qualified medical expenses, there are some significant differences between the two. Here is a breakdown of how an FSA and HSA differ
