Money Smarts Blog

HSA vs FSA: Do you know the difference?

Nov 8, 2022 || Allison Anderson, Senior Human Resource Specialist

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HSA, FSA, PPO, HDHP… the list goes on of acronyms to consider when deciding which health plan is best for you and your family. If you haven’t taken advantage of an HSA (Health Savings Account) or FSA (Flexible Spending Account), you might be missing out on savings in your pocket. I’ve broken down the HSAs and FSAs to help you decide what's best for you. 

What is an HSA?

HSA is short for Health Savings Account. This savings account is specifically designated for qualified health expenses (anything from doctors’ bills to contact lens solution). An HSA is owned by the individual (that’s you) and is tax-free. It’s designed to help people save money for health expenses and to help cover costs not paid for by your medical insurance plan.

What makes an HSA so much better than just a regular savings account? The biggest advantage to having an HSA is the tax-free contributions and the potential for these funds to grow year over year if not used. When contributing to your HSA via a payroll deduction the funds are taken out before taxes are applied, which means more money to use on medical expenses. Plus, they roll over year to year if you don’t use them. 

If you contribute to your HSA and do not use the funds you can invest them to grow over time. This can give you a nice nest egg to cover medical expenses during retirement. These investment gains are also tax-free.

Example: if you use money from your 401(K) account to cover medical expenses during retirement, you have to pay taxes on the funds. But if you use your HSA, you’re exempt from paying taxes on the funds.

  • $100,000 (401K) – $24,000 (taxes) = $76,000 to use on healthcare costs
  • $100,000 (HSA) –  $0 (tax-exempt) = $100,000 to use on healthcare costs

After age 65 HSA funds can be withdrawn for any purpose but will be taxed if not used for medical expenses.

Qualifications and things to keep in mind:

  • You must be enrolled in a high-deductible health plan (HDHP)
  • Cannot be claimed as a dependent on another person’s tax return (unless it’s your spouse)
  • Cannot already be covered by Medicare or TriCare
  • There is a limit on how much you can contribute yearly (2023 limits are $3,850 for an individual and $7,750 for family)
  • If turning age 55 within the year, you can contribute an additional catch-up amount of $1,000  
  • Many HSA will allow you to update your contribution amounts throughout the year

What is an FSA?

FSA is short for Flexible Spending Account. This is another unique type of account designed to help with medical and childcare expenses. An FSA can be set up through your employer and the money is deducted directly from your paycheck, pre-tax. Having a medical plan through your employer is not necessary to enroll, however you can't contribute to the HSA and medical FSA at the same time. 

How does it work? You determine how much you want to contribute to your FSA via a payroll deduction. The funds will be deducted in equal amounts throughout the year tax-free. Some employers also choose to contribute to your FSA, make sure you ask yours!

Qualifications and things to keep in mind:

  • Funds will not roll over year to year, the funds are “use it or lose it”
  • Once you elect an annual amount to fund the FSA, you can only update contribution amounts if you have an IRS qualifying event
  • Funds must be spent on IRS qualified medical expenses
  • Cannot be enrolled in an HDHP medical plan
  • Most accounts include a debit card tied directly to your FSA

Key things to remember about HSAs and FSAs:

  • HSA is available only available with a high deductible health plan
  • HSAs allow you to keep funds in the account year after year and/or to invest so you have savings for medical expenses down the road or during retirement
  • FSAs don’t roll over year to year
  • FSA contributions can only be updated if you have an IRS qualifying event 
  • FSA is typically available with a traditional, low-deductible medical plan or as a benefit by itself
  • FSA can be used for childcare expenses (as long as you designate a specific childcare expense plan)
  • Both are subject to income tax if not used on qualified medical expenses
  • Both options are funded via payroll deductions and use pre-tax income
  • Both have a debit card option for easy access to your money

How do I know what option to choose?

Both HSA’s and FSA’s have clear advantages and will save you money in the long run. Ultimately, the decision depends on the health plan you choose – high deductible or a PPO.

If you are someone who does not anticipate a lot of doctor visits and medical expenses in the near future, then a high-deductible plan and HSA option may work best for you. This will allow you to save more money in your HSA for future medical costs and/or invest anything you don’t use toward the end of the year.

Be sure to check all medical plans available to you and prepare for unexpected costs throughout the year. Comparing deductibles, coinsurance, and out-of-pocket maximums will be key in your decision making. The HSA and FSA are available options to help plan for additional medical, dental, and vision expenses that your medical plan may not cover.

When deciding on a medical plan keep these options in mind but consult with your insurance provider or employer for more information.

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