Differences Between FSA and HSA

Understanding the differences Between FSA and HSA is very vital for making informed decisions about healthcare financing and tax-advantaged medical savings accounts. Both Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) serve as valuable tools for managing healthcare expenses, offering tax advantages and helping individuals budget for medical costs, but they operate under different rules, have distinct eligibility requirements, and provide varying levels of flexibility in terms of contribution limits, fund rollover options, and account ownership characteristics.

Basic Account Characteristics

FSA Overview
Flexible Spending Accounts are employer-sponsored benefit plans that allow employees to set aside pre-tax dollars for healthcare expenses. These accounts must be established through an employer, and the funds are typically subject to a “use-it-or-lose-it” rule at year’s end.

HSA Overview
Health Savings Accounts operate as personal savings accounts specifically designed for healthcare expenses. They offer triple tax advantages: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Eligibility Requirements

FSA Eligibility

• Must be offered through employer
• No health insurance plan requirement
• Available during open enrollment periods
• Cannot be self-employed

HSA Eligibility

• Must have a qualifying High Deductible Health Plan (HDHP)
• Cannot have other health coverage
• Cannot be enrolled in Medicare
• Cannot be claimed as a dependent

Contribution Limits and Rules

FSA Contribution Guidelines
The annual contribution limits are set by the IRS and employers:

• 2024 limit: $3,200 per individual
• Contributions must be decided before the plan year
• Changes only allowed during qualifying life events

HSA Contribution Features
Higher contribution limits with additional benefits:

• 2024 limit: $4,150 for individuals
• 2024 limit: $8,300 for families
• Additional $1,000 catch-up contributions for age 55+
• Can change contribution amounts anytime

Fund Rollover and Portability

FSA Rollover Rules

• Traditional use-it-or-lose-it rule
• Employers may offer up to $610 rollover
• Alternative: 2.5-month grace period
• Funds typically lost when leaving employer

HSA Portability Benefits

• Full rollover of funds year to year
• Account stays with individual regardless of employment
• Investment options for long-term growth
• Funds never expire

Tax Advantages

FSA Tax Benefits

• Pre-tax contributions reduce taxable income
• Tax-free withdrawals for qualified expenses
• Immediate access to full year’s contribution amount

HSA Tax Advantages

• Triple tax advantage structure
• Tax-deductible contributions
• Tax-free growth on investments
• Tax-free qualified withdrawals

Qualified Expenses

FSA Eligible Expenses

• Medical and dental services
• Prescription medications
• Over-the-counter medicines
• Medical equipment and supplies
• Vision care and hearing aids

HSA Qualified Costs

• All FSA-eligible expenses
• Long-term care insurance premiums
• COBRA coverage
• Health insurance premiums while unemployed
• Medicare premiums (age 65+)

Account Management

FSA Administration

• Employer manages the account
• Usually comes with debit card
• Requires submission of receipts
• Annual election amount locked in

HSA Control

• Individual owns and manages account
• Multiple investment options available
• Can change banks/administrators
• More flexible contribution adjustments

Long-term Planning Considerations

FSA Strategy

• Best for predictable annual expenses
• Requires careful planning to avoid forfeitures
• Good for immediate tax savings
• Limited long-term planning value

HSA Strategy

• Excellent retirement healthcare planning tool
• Investment potential for long-term growth
• Can serve as additional retirement account
• Flexible spending timeline