Both offer a tax break for medical expenses, but HSAs are more versatile. You may be eligible for a health savings account (HSA) or a flexible spending account, depending on your health insurance plan and the benefits your employer provides (FSA). Using these accounts can help you save money and plan for unexpected medical expenses throughout the year. HSAs and FSAs, on the other hand, have different qualifications and benefits. Before signing up for an HSA or FSA, here's everything you need to know.
What's the Difference Between an HSA and an FSA?
Qualifications or Requirements It is necessary to have a high-deductible health plan (HDHP). Individual plans must have a deductible of $1,400, while family plans must have a deductible of $2,800. You cannot be enrolled in Medicare or designated as a dependent on someone else's plan. There are no requirements; a group or an employer usually provides them. What if You Change Employers? Even if you change jobs, the money in your HSA stays with you. Because FSAs do not follow you to your new job, any money in the account that you do not use could be lost. Rollover Rules Every year, unused funds in your HSA will roll over and can be saved in your account for the long term. Depending on the employer's policies, $550 can be carried over to the next plan year, or employers may allow an additional 2.5 months to spend the previous year's contributions. If the employer agrees, there are some exceptions to the rule that allows all funds to be carried over. Annual Contribution Limits Individual contribution limits for 2022 are $3,650 for individuals and $7,300 for families. This compares to $3,600 and $7,200 in 2021. The individual FSA contribution limit for 2022 is $2,750. It is up to your employer to decide whether or not to allow contributions up to that amount. Changes to Contributions Yes, as long as your contributions do not exceed the annual cap. Unless you have a qualifying life event or change your plan or employer, changes can usually only be made during open enrollment. Long-Term Savings Potential Yes No Penalty for Using the Funds Before age 65, funds used for non-medical expenses must be declared on your tax return, or a 20% penalty will apply. Savings can be withdrawn and used without penalty after reaching the age of 65 in retirement. Your employer and the FSA may impose penalties. For more information, contact your plan administrator or your employer. Tax Savings You can make pre-tax contributions directly from your paycheck. Tax-deductible contributions grow tax-deferred. You can withdraw your savings tax-free once you've reached the age of 65. Taxes are not levied on funds used for qualified medical expenses. You can make pre-tax contributions directly from your paycheck. Taxes are not levied on funds used for qualified medical expenses. Special Notes HSAs can be accessed in a variety of ways; make sure to inquire about whether you'll receive a debit card and how expenses and reimbursements work. A small carryover or grace period may be permitted under FSAs. However, this is up to the plan administrator or employer's discretion, so check with yours for more information.Requirements or Qualifications
It would be best if you chose a high-deductible health plan to be eligible for a health savings account (HDHP). You cannot be declared a dependent on someone else's insurance plan or enrolled in Medicare. The minimum deductible for 2022 is $1,400 for individuals and $2,800 for families, and you can open an account through your employer or on your own. A flexible spending account can only be opened through an employer or other group that offers it; however, unlike an HSA, there are no additional qualifications or restrictions.Health-Related Expenses
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are designed to cover qualified medical expenses. Unless you're paying for COBRA coverage or receiving unemployment benefits, health insurance premiums aren't usually considered a qualified medical expense by HSAs. Both types of accounts can be used to pay for prescription medications, including insulin. Menstrual care products and over-the-counter medications are also eligible expenses. These accounts typically cover copayments and deductibles for doctor visits and hospital stays. Teeth whitening isn't considered a qualified health expense, but essential dental care is. Glasses are also a tax-deductible expense. In general, you can pay for it with HSA or FSA funds if it's something you can deduct as a medical expense on your taxes. Note that you can withdraw funds from an HSA for non-medical expenses until you reach the age of 65, but you will be subject to income tax and a 20% penalty. You only pay income tax on amounts withdrawn for non-medical reasons after age 65, so an HSA could be a valuable source of retirement funds.Restrictions
Both types of plans have restrictions because they offer a tax-free way to save for medical expenses. FSAs, on the other hand, are generally the more restrictive of the two plan types. For example, when you change jobs, you can't transfer your FSA to a new employer, and you can only change your contribution during open enrollment or if you have a qualifying life event like getting married or having a child. HSAs are exempt from these rules. The most significant distinction between the two accounts is the amount of money you can deposit and the length of time you can keep it there. Each year, you can contribute more to your HSA and roll over any remaining funds at the end of the year. Individuals can contribute $3,650 per year to an HSA in 2022, while families can contribute $7,300. The annual contribution limit for a flexible spending account (FSA) in 2022 will be $2,750. (unchanged from 2021). Employers with an FSA may allow you to carry over up to $550 to the following plan year or give you a 2.5-month grace period to spend the funds from the previous year. If your employer allows it, you may be able to carry over your entire contribution from 2021 to 2022.Savings Opportunities and Tax Breaks
HSAs and FSAs both have the same upfront tax benefits: you can put money into them and withdraw it tax-free to pay for medical expenses. HSAs, on the other hand, provide far more tax benefits and potential savings. Your HSA becomes another savings vehicle in your broader financial portfolio because you can roll over your balance each year. This money will also grow tax-deferred, which means you won't have to pay taxes on it until you withdraw it. If you wait until after age 65, during retirement, to withdraw that money, you will be able to do so tax-free. Many people use an HSA as a backup retirement account because of these benefits. Important: Because the funds you deposit are pre-tax, both HSAs and FSAs save you money on taxes. That is, they are deducted from your earnings before deducting taxes. Your taxable income will be reduced as a result.Which is the best option for you?
HSAs, on the whole, are more adaptable. They allow you to save money by paying lower taxes, as well as save money over time because any money you don't use in a given year rolls over and accumulates as savings. However, you must have an HDHP, and not everyone is comfortable with this type of insurance. An FSA does not accumulate over time, and any funds left over at the end of the year may be lost. If you change jobs, you may lose your FSA as well. If you don't qualify for an HSA, an FSA can help you save money on taxes while also allowing you to budget for medical expenses.The CARES Act's Impact on FSAs and HSAs
For 2020 and 2021, the Coronavirus Aid, Relief, and Economic Security (CARES) Act made significant changes to health savings accounts (HSAs) and flexible spending accounts (FSAs). A significant change was made to telehealth appointments. Patients with high-deductible health plans and HSAs can have telehealth appointments before they reach their deductible under the CARES Act. The second provision allows HSAs and FSAs to include over-the-counter medical products as eligible expenses without a prescription, which was not possible before the new law. The Consolidated Appropriations Act 2021, which includes some CARES Act provisions, was signed into law on December 27, 2020. Taxpayers with flexible spending accounts for dependent care and FSAs could roll over funds from 2020 to 2021 and 2021 to 2022 under this plan. Employers could also allow their employees to change their contribution amounts to these types of accounts in the middle of the year in 2021.Main Points
- Both HSAs and FSAs are tax-advantaged medical savings accounts.
- An HSA can only be funded if you have a high-deductible health plan.
- HSA funds can be carried over from year to year and from employer to employer, and funds can be withdrawn without penalty after age 65 for non-medical purposes.
- Employers typically provide FSAs, and funds do not typically carry over from year to year in full (though special rules apply for rollovers from 2021 to 2022).
- An FSA is a good alternative if you don't have access to an HSA.
Most Commonly Asked Questions (FAQs)
What expenses are covered by an HSA?
HSAs can be used to pay for qualified medical expenses and some insurance premiums. While you're unemployed, long-term care insurance premiums, COBRA premiums, and health insurance premiums are all eligible. According to the IRS, medical expenses are the "costs of disease diagnosis, cure, mitigation, treatment, or prevention."What is covered by a Flexible Spending Account (FSA)?
FSAs are similar to HSAs in that they cover qualified medical expenses as well as some insurance premiums. Prescriptions, ambulance services, and various types of therapy are examples of qualified medical expenses. FSAs don't cover cosmetic surgery, gym memberships, maternity clothes, and nutritional supplements, just like they aren't covered by HSAs.Is it possible to have both an HSA and an FSA?
If the FSA is designated as a limited-purpose FSA, you can only have an HSA and an FSA at the same time. These FSAs must be used for a specific purpose, such as covering long-term care costs instead of the HSA's regular medical expenses.