Health Savings Accounts (HSA's) and Flexible Spending Accounts (FSA's) have different uses and qualifications, but the most considerable variation between them is based on who technically "owns" the account, you or your employer.
You could use the money in these accounts for copayments, medical equipment, qualified health care costs, deductibles and in some cases, some medication.
HSA's are generally more flexible as they're owned by you, whereas FSA's are owned by your employer and are more rigid in what they permit.
Let's take a good look at the major differences between the FSA and HSA and what their qualifications are, respectively, in Part 1 of our series on these account types.
Check to see if the products and/or services you need are eligible for FSA coverage at the FSA Store's Eligibility Checklist. You can browse by category or, alphabetically all online!
You (generally) can't have both a FSA and a HSA because these accounts cover the same kind of health expenses. The only caveat to this rule is if you were to open a "limited-purpose flexible spending account" (LPFSA) which can be used for dental and vision needs exclusively.
HSA's have big tax advantages, because the money you put into them is pre-tax. Better still, if you add more funds later, that money is tax deductible. If that wasn't good enough, your HSA grows and is withdrawn tax free (when used for qualified expenses).
Annual HSA Contribution limits are: $3,450 per individual or $6,900 as a family (as indexed in 2018). That said, if you're 55 or older, you can include a “catch up” contribution, which is $1,000 (also as indexed in 2018).
If you become eligible for Medicare, your HSA contributions must cease.
Employers could make contributions to a FSA, but they're not required to (it would be a great perk!)
FSA Contribution limits cap at $2,750 (2020) per year per employee (spouses of employees can also put in $2,750 with their employer).
FSA money must be used within the plan year (there are exceptions to this, however, that are employer-dependent). Use it or lose it!
If you’re an employee of an employer-sponsored plan (or are self-employed), chances are you probably have a few options. Regardless of which one you are, you must first be covered by a high deductible health plan (HDHP).
Coverage by any other kind of comprehensive plan is not permitted, and you cannot be a recipient of Medicare. Lastly, you cannot be claimed as a dependent on another person’s tax return if you want to qualify for a HSA.
Fairly straight forward - this must be set up by your employer, but does not have the same limitations and as a HSA. Additionally, if you have dependents to care for, you can establish a Dependent Care FSA (or DCAP).
This allows you to put aside tax-free money to care for your dependents, whether young or elderly. Examples of covered costs you could use a DCAP for would be daycare, after school care or care for your aging parents and the associated costs.
Differences between HSA and FSA
Ultimately, the biggest difference between a HSA and a FSA is that one is much more flexible (the HSA) with lower contribution amounts, whilst the other (the FSA) is made to be flexible. Here's a quick chart to highlight the most important differences between the two.
If you have questions about how to set up or manage a FSA or HSA, please give us a call!
Annual Contribution Limits
Up to $3,450 per person and up to $6,900 per family.
Up to $2,650 per person and up to $5,300 per family.
Who Owns It
Owned by you and carries over with any employment changes
Owned by your employer, does not carry over with job loss or change (unless eligible with COBRA).
Anything unused can roll over into the next year.
Your employer will choose whether the funds expire at year end, whether or not you get a grace period (of 2.5 months to use the funds) and whether or not you can roll over up to $500 in the following year.
Applicable Withdrawal Penalties
Savings withdrawals are tax-free after age 65. However, if used before age 65 for *non medical* expenses, a 20% penalty must be declared on your income tax return.
Depending on your employer, you may not be able to access funds for non-medical expenses. Additionally, you may have to submit your expenses for reimbursement.
When you can update contributions
Whenever you’d like, as long as you don’t go beyond your limit.
You can change your contributions either at open enrollment time, if your family situation changes (eg: new baby, marriage, divorce, etc.) or if you change your plan/employer.
Lastly, you must have a HDHP (this applies to self-employed individuals as well).
Employer must set it up.
You cannot be self-employed or unemployed to have a FSA.