HSAs and FSAs are both great savings vehicles that can help you reduce medical expenses. When it comes to determining which account is right for you, it’s important to weigh the benefits of each account.
What is a Flexible Spending Account (FSA)?
A Flexible Spending Account, also known as an FSA, gives you the opportunity to avoid taxes on money you pay for out-of-pocket eligible expenses. A Health FSA is one type of FSA where you save on medical, dental and vision expenses. Additionally, FSAs are not tied to your health insurance, so it doesn’t matter what plan you’re enrolled in – you can participate regardless. As long as you’re benefit eligible with your employer, you can sign up for this account.
When you enroll in a Health FSA, you lower your taxable income and increase your take-home pay. With total federal and state rates as high as 40%, enrolling in a Health FSA can result in significant tax savings!
Some employers offer a grace period or carry forward provision with the plan, giving you additional time to use unspent funds. (Check with your HR/Benefits Department to see if your plan offers the grace period or carry forward option.) However, even with these provisions, you can still lose unused funds in your account. This is known as the “Use or Lose” rule. To help prevent losing unspent funds, only contribute what you think you’ll spend in the upcoming year. Use our FSA calculator to budget for predictable expenses!
Additionally, FSAs are not portable, so if you leave your employer, you leave your account.
Pro Tip: Penny Panda explains what an FSA is.
What is a Health Savings Account (HSA)?
An HSA is an employee-owned tax-advantaged account. Like an FSA, when you enroll in an HSA you can use the account to pay for medical, dental and vision expenses with tax-free dollars. But, that’s pretty much where the similarities end. While both accounts reimburse the same expenses, HSAs and FSAs have different eligibility requirements and rules.
To qualify for an HSA, you must be 18 years of age and have an HSA compatible high-deductible health plan (HDHP) and not be covered by any other prohibited health coverage, i.e., certain FSAs or HRAs.
For 2021, your HDHP must have a minimum deductible of $1,400 if you’re enrolled in individual coverage and $2,800 if you’re enrolled in family coverage. Click here to view the adjusted amounts for 2021.
Triple Tax Savings
HSAs are triple tax advantaged, which means you receive tax savings on three components:
- Contributions are made with pre-tax dollars (similar to an FSA)
- Funds earn interest tax-free
- Withdrawals for qualified expenses are tax-free
HSA or FSA: Key Differentiators
|Eligibility||Completely independent from insurance; you do not need to be enrolled in a specific health plan to participate.||You must be enrolled in a qualifying high deductible health plan (HDHP).|
|Tax Savings – How Much?||Use pre-tax dollars and save 30% – 40% on eligible expenses, depending on your tax bracket.||Triple-tax advantaged: |
1. Contributions are made with pre-tax dollars
2. Funds earn interest tax-free
3. Withdrawals for qualified expenses are tax-free
|Investment Options||No||Yes! You can invest your contributions and earn interest.|
|Maximum Contribution Amounts||For 2021, you can enroll in up to a maximum of $2,750, regardless of your insurance coverage.||For 2021, you can contribute up to $3,600 (for single coverage) or $7,200 (for family coverage).|
|Do Funds Rollover?||It depends. If your employer offers the rollover option unused funds, up to $550, will roll over into the plan year. Any amount over $550 is forfeited at the end of the plan year and does not roll over. If your employer doesn’t offer the rollover, unused funds will be forfeited at the end of the year.||Yes; funds roll over year-to-year and never expire. Your account is completely portable, which means you can take it with you if you leave your employer.|
|Can You Change Your Contribution Mid Year?||Not typically, unless you experience a qualifying event such as marriage or birth of a child.||You can make changes throughout the year, up to the annual limits.|
Both account options provide savings for you and your family. It’s just a matter of deciding which option fits your needs better. Remember: participating in an HSA helps you save for the future. Enrolling in a Health FSA allows you to save money on expenses for the upcoming year.