An FSA (Flexible Spending Account) and an HSA (Health Savings Account) are both types of accounts that allow individuals to save money for medical expenses, but they have key differences:
- Eligibility:
- FSA: Typically offered through an employer-sponsored benefits plan, FSAs are available to employees who work for companies that offer them. They may also be available through certain government programs.
- HSA: Available to individuals who have a high-deductible health insurance plan (HDHP). Not all HDHPs offer HSAs, but individuals can often open them independently.
- Ownership and Portability:
- FSA: Usually owned by the employer, meaning that if you leave your job, you might lose any unused funds in the account. However, some FSAs allow for limited rollover or grace periods.
- HSA: Owned by the individual, allowing them to keep the account even if they change jobs or health insurance plans.
- Contributions:
- FSA: Contributions are typically set by the employee before the plan year begins and are deducted from their paycheck throughout the year. There is usually an annual contribution limit set by the IRS.
- HSA: Contributions can be made by both the individual and their employer (if applicable). There are annual contribution limits set by the IRS, and individuals can often make contributions themselves or have them deducted from their paycheck.
- Tax Treatment:
- FSA: Contributions are made with pre-tax dollars, reducing the individual’s taxable income. Withdrawals used for qualified medical expenses are also tax-free.
- HSA: Contributions are made with pre-tax dollars (or are tax-deductible if made outside of payroll deductions), reducing taxable income. Withdrawals used for qualified medical expenses are tax-free, and any interest or investment gains in the account are tax-free as well.
- Rollover/Forfeiture:
- FSA: Typically, funds in an FSA must be used by the end of the plan year, although some plans offer a grace period or allow for limited rollover of funds.
- HSA: Funds roll over from year to year and can accumulate over time. There is no “use it or lose it” provision for HSAs.
In summary, while both FSAs and HSAs offer tax advantages for medical expenses, HSAs provide more flexibility, ownership, and long-term savings potential compared to FSAs. However, HSAs are only available to individuals with high-deductible health insurance plans.
