HSA vs. FSA: Which makes sense for you?
Both health savings accounts (HSAs) and flexible spending accounts (FSAs) are government-supported savings programs that can make medical expenses, including vision care, more affordable.
FSAs are tax-advantaged savings accounts in which you can put aside funds to cover qualified medical expenses. In most cases, your money must be spent during the same calendar year it was set aside, and the funds do not earn interest.
Like FSAs, HSAs are pre-taxed savings accounts, but they’re available only to people who are enrolled in health insurance plans that have high deductibles. HSAs are more flexible than FSAs, since unspent funds can be rolled over into the next year.
Both can provide an excellent opportunity to save money for health care costs and reduce your taxes at the same time. And both can bring you peace of mind, since you’ll know that funds are available to cover unanticipated medical costs if they arise.
But these plans have different benefits and are offered to employees in different circumstances. Read on to learn more about which one would make the most sense for you.
HSA: Are you eligible?
An HSA isn’t available to everyone. This is a special tax-advantaged savings account offered to people enrolled in qualified High Deductible Health Plans (HDHPs). HDHPs have a higher annual deductible than typical insurance plans, but they typically have lower premiums.
To qualify for an HDHP in 2020, an insurance plan must have an annual deductible of at least $1,400 for an individual plan and $2,800 for family coverage.
What are HSA benefits?
Signing up for an HSA will bring you several key benefits. HSAs are generally more flexible than an FSA and offer greater tax advantages.
The major advantages of HSAs include:
Any money you deposit in your HSA is not taxed, nor is the interest it earns.
You’ll pay no taxes on the money you withdraw to pay for qualified medical expenses.
You can adjust the amount you’re contributing to the account at any point throughout the year.
Unspent balances at the end of the year roll over into the next year. This makes this account a good vehicle for long-term savings.
Your HSA belongs to you, not your employer, and can follow you when you switch jobs or leave the workforce.
What is a flexible spending account or flexible spending arrangement (FSA)?
Like HSAs, FSAs are tax-advantaged savings accounts in which you can accumulate funds to cover certain types of medical costs. Many types of health care expenses are eligible, including eyeglasses, contact lenses and eye exams.
Because they’re not tied to enrollment in a particular type of health insurance plan, FSAs are more widely available than HSAs.
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What are FSA benefits?
FSAs offer significant benefits, and enrolling in one can help you save on medical costs by reducing your taxable income.
The benefits you’ll get from signing up for an FSA include:
You’ll save the full amount of the taxes you’d otherwise have paid on the money you contribute to an FSA.
You can use the funds for a wide array of medical expenses, ranging from contact lens solutions to LASIK surgery.
FSAs usually issue a debit card, making it easy and convenient to pay your health care bills or reimburse providers for qualified medical expenses.
FSAs are typically less flexible than HSAs, however.
What are the most important differences between HSAs and FSAs?
The biggest difference between an HSA and an FSA is that an FSA is a “use-it-or-lose-it” account. At year’s end, any unused funds are forfeited.
However, some plan administrators may allow a small carryover or grace period. This can give you an extra 10 weeks to spend your FSA funds, or allow you to roll over as much as $500 to the next calendar year. Unlike an HSA, which does allow funds to roll over year after year, an FSA is not suitable for a long-term savings strategy.
Other differences between HSAs and FSAs are:
You can contribute more to an HSA than an FSA. For 2020, the annual maximum you can contribute to an HSA is $3,550 for an individual and $7,100 for a family. The FSA contribution limit for 2020 is $2,750 for an individual account and $5,000 if you have dependents.
An FSA account does not earn interest.
Your FSA account is actually owned by your employer, and you’ll lose any unused funds if you change jobs.
You cannot change your FSA contribution amount once you’ve established it at the start of the year except in specific circumstances. These include major life changes such as marriage, divorce, the birth of a child or the death of a spouse. A change in employment status or a dependent’s ability to meet eligibility requirements also allows you to alter your contribution amount.
The advantages of an HSA might seem greater than those of an FSA since contribution limits are higher, interest can be earned and your savings can grow from year to year. But not everyone qualifies for an HSA. If you don’t qualify for an HSA, signing up for an FSA is a wise decision.
You can use either an HSA or an FSA to pay for vision exams or other eye care expenses that aren’t covered by your health insurance. If you’re due for an eye exam, don’t wait. Find an eye doctor near you and use your FSA/HSA dollars today.
Page published in September 2019
Page updated in January 2021