Health savings accounts and flexible spending accounts are two different types of accounts that allow an individual to set aside pre-tax funds to pay for medical expenses. Which type of account is best for you, depends on your situation. Both types of plans require that funds be spent on qualified medical expenses, as defined by the IRS.
Whose money is this?
Flexible spending accounts are owned by a plan administrator, typically your employer. They make the rules of the plan within the limitations set by law. Health savings accounts are owned by you, but also have limits and requirements set by law. One noteworthy requirement to enroll in a HSA is, you must be enrolled in a qualified high deductible health plan. If your employer offers both options, understanding the differences between the two types of accounts will help you understand which may be best for you.
When can you spend the money?
One of the first differences is when you have access to your funds. With a FSA, you have access right away to the entire amount you committed to saving. With a HSA, you only have access to the funds you have contributed so far. So, if you sign up for a FSA plan and commit to putting a total for the year of $2400 into the account, you can access that right away. This is a good option if you know you will be having an expense in the near future after the plan goes into effect. If you sign up for a HSA plan, and commit to the same $2400, or $200 monthly, after one month’s contribution, you can access that $200, but no more. A simple way to remember this difference is to think of a FSA as similar to a credit card and a HSA as similar a debit card.
Are the funds “use it or lose it”?
Another difference between the accounts is what happens to them at the end of the plan year. Typically, the funds in a flexible spending account are referred to as “use it or lose it”. This means if you do not use the funds, they are lost. There are sometimes grace periods and small amounts that can be rolled over, but this is different for each plan and has limits, based on IRS rules. In December 2020, the federal government passed a law that allowed for more rollover and longer grace periods in accounts like this. Check with your plan administrator to learn if they are taking advantage of any of these changes for flexible spending accounts.
The funds in a health savings account roll over from year to year. They are yours forever, even if you leave the job where you get your health insurance currently. They go with you! This is a great option if you work in an industry that tends to have a lot of movement, or if you want to put money away for future medical expenses but don’t expect to have much out of pocket in the upcoming year.
Another advantage of the health savings account is it’s ability to grow over time without funds being taxes. Your health savings account contributions have what is referred to as triple tax advantage:
- Your contributions are “pre-tax” meaning you are not taxed on them prior to putting them into your account.
- If your money earns interest while sitting in a health savings account, you are not taxes on that interest earned, so long as the funds are used for medical expenses. Sometimes, you can even use the funds within the account to invest. Check with your account administrator for minimum requirements for investments.
- When you pull your money out, and use it for medical expenses, it is not taxed.
How much can you contribute?
The limitations on how much you can contribute to a FSA and a HSA change yearly, and are determined by the IRS. However, generally, HSA accounts having higher contribution limits meaning you can put more away. For example, in 2021 the IRS limit for a FSA account for an individual is $2750, and the IRS limit for a HSA account is $3600. Both of these double for a family plan. Because a FSA is an employer owned and administrated account, the employer, or plan administrator, can further limit the contributions. HSA’s on the other hand have a “catch up” contribution for those over the age of 55. This means that individuals age 55 or older can make an additional $1000 contribution annually to their HSA. Also, with many HSA administrators offering investment options, HSA funds may be a great interest earning way to save for expected future medical expenses.
Do you have to choose?
The short answer is, usually yes. There are very few instances when you would be able have both a health savings account and a flexible spending account. One example involves having a limited use flexible spending account to pay for only specific expenses (such as dental and vision or dependent care), while using a health savings account to pay for major medical expenses. Another example would be when you change plans from a qualified high deduction health plan with an HSA to an employer sponsored plan that offers a FSA. Because your HSA funds roll over, you will still have them when/if decided to enroll in a plan with a FSA. You can still use the funds in the HSA to pay for medical expenses while contributing to the new FSA, but you would no longer be able to contribute to the HSA.
Still have questions about the two types of accounts? Check out further reading from the references below, or reach out to us.
References
https://www.irs.gov/pub/irs-drop/rp-20-32.pdf
https://www.irs.gov/pub/irs-pdf/p969.pdf
The information in this article is meant to be informational only, and is not insurance or health advice. For insurance advice, it is best to discuss your unique situation with a licensed health insurance professional. If you need a referral, reach out to us. For health advice, you should also discuss your unique situation with a qualified professional. Again, we are happy to help. Just reach out.
