Employee Benefits: What is the Difference Between an HSA and an FSA?

A common question we receive during this time of year has to do with employee benefits. Most employers are hosting open enrollment to sign up for health insurance and other benefits programs. Many people are unclear what a Health Savings Account (HSA) and a Flex Spending Account (FSA) are and which option will best meet their needs. 

It is helpful to start by reviewing what an HSA and an FSA account are and then go into what each has in common and what is contrasting.

Health Savings Account (HSA):

This type of savings account lets you set aside money pre-tax to pay for qualified medical expenses. HSAs can be used to save money for medical expenses. In order to qualify for an HSA, you must be enrolled in a high-deductible health insurance plan (HDHP) as defined by the government.

Flex Spending Account (FSA):

This account is an employer-sponsored healthcare benefit that allows employees to set aside a certain amount of money, which is pre-determined by the government, to help cover the cost of eligible medical expenses. It is similar to a savings account but used for qualified health-related costs. FSAs work on a yearly plan basis and are funded through regular payroll deductions on a pre-tax basis.

Watch the video explaining the similarities and differences between HSAs and FSAs or keep reading:

What are the similarities between an HSA and an FSA?

• Both accounts are designed to allow you to save money for qualifying health-related expenses. For example, you can defer your money and use it to pay for eligible health, dental, or vision expenses, including doctor or dental visits, eyeglasses, and, as of 2020, you can pay, not only for prescriptions but also for over-the-counter medicine.
• You are deferring your money on a pre-tax basis. When used for eligible expenses, the money comes out of the account tax-free. So, it is a tax-free place to pay for you and your family’s medical and dental-related expenses.
• Typically, both accounts access funds through a dedicated debit card directly to that account.

There are meaningful differences between a Health Savings Account and a Flex Spending Account.

Some of the differences between HSA and FSA accounts include:

• With a Health Savings Account, you have ownership and control over it. Therefore, if not used up, the balance in this account simply rolls forward to future years.
• In contrast, the balance in a Flex-Spending Account is forfeit if not used. In some cases, an FSA is referred to as a “use it or lose it” type of account. There is about $550 that can roll forward from year to year.
• For example, if you deferred $5,500, which is the 2021 maximum, to a Flex Spending Account, and you end up only spending $2,000 worth of eligible expenses, that extra $3,500 would essentially be forfeit except for the rollover provision.
• With a Flex Spending Account, you definitely want to forecast, anticipate, and think through the likely eligible expenses you and your family will have.
• In an HSA, you can save $7,200 (family), and any used balance accumulates. And, in some cases, there will be HSA accounts with balances from $20,000 - $40,000 because they are accruing over time and not being depleted.
• HSA accounts almost always have an investment option to them. As part of this feature, you will want or may be required to keep a certain amount in cash to cover expenses. However, when there is a larger account balance, it can be invested in a selection of mutual funds offered by the HSA provider, similar to choosing from a selection of funds in a 401(k) account.

How Does Money Come Out of a Health Savings Account vs. a Flex Spending Account?

As mentioned before, account holders generally have a debit card that you use at the provider or store when you purchase eligible items. If you use the debit card on non-eligible items, there is a penalty. However, with an HSA, any balance that accrues and exists after age 65 can be used on anything without penalty. Now, this does not mean it is not a health-related account. It is still designed to be used for healthcare expenses. So, if you use it for healthcare expenses or even qualifying insurance premiums, it is tax-free and penalty-free. But, after age 65, you can use it on non-health-related expenses penalty-free. Then, you will just be subject to taxation on the withdrawal.

So, that is something that many folks anticipate and plan for as they start thinking more assertively about retirement.

Can You Have Both an HSA and an FSA Account?

In general, the answer is no because both accounts cover the same types of expenses. The IRS doesn’t want you deferring into both an FSA and an HSA to cover the same costs with pre-tax, tax-free money. The exception to the rule is that some employers will offer a limited use Flex Spending Account. So, if the FSA has limited use, it will only cover dental and vision expenses as qualifying expenses. In that case, your HSA can cover health, dental, and vision, and your FSA can only cover dental and vision. If that is the setup with your employer, then yes, you can have both an FSA and an HSA.

More Questions Around Health Savings Accounts and Flex Spending Accounts

We know that benefits elections are not a one-size-fits-all recommendation. Your financial planner can help answer questions and talk to you through your unique financial situation to determine which benefits elections are best suited for you and your family. Please connect with your SDT financial planner if you have questions regarding your options.

If you have additional questions, you can read through IRS Publication 969 that has all the details on both plans and a couple of other options that generally are not as prevalent.

Resources:

IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans

CRN202410-1133449