Trying to choose between a health savings account (HSA) and a flexible spending arrangement (FSA) can be enough to make your eyes cross. In some ways, they’re very similar: they’re both accounts you can contribute to tax-free to save for medical costs. In other ways, they’re very different, and with several key differences between HSAs and FSAs, it literally pays to get this decision right.
Both HSAs and FSAs allow people with health insurance to set aside money for health care costs referred to as “qualified expenses,” including deductibles, copayments and coinsurance, and monthly prescription costs. Sometimes employers will also contribute funds to these accounts. In most cases, you receive a debit card for your account and can use it to pay for qualifying expenses throughout the year. Both types of accounts have tax benefits, too, although those benefits aren’t the same.
In general, electing to sign up for an HSA or FSA is smart. Knowing which one to select and how to get the most out of it will take some education.
Are you eligible for an HSA?
Health savings accounts are not available to everyone. This is the first key difference, and if you aren’t eligible for an HSA, it makes your decision much easier. Only people who have a high-deductible health plan, or HDHP, can select an HSA.
For 2019, an HDHP must have a deductible of $1,350 or more for an individual or $2,700 or more for a family. These plans also cap the amount you can spend in a year out-of-pocket for covered services at $7,900 for an individual and $15,800 for a family.
To qualify for an HSA, this HDHP must be your only health insurance plan, you must not be eligible for Medicare and you cannot be claimed as a dependent on someone else’s tax return. Not all plans with deductibles over these limits qualify for HSAs, so it’s important to check with the insurer before you buy.
Important differences between HSAs and FSAs
As you can see in the following table, there are several additional differences between these accounts. Things like your flexibility in contributing, the ability to keep your unused balance and additional tax benefits make HSAs the wisest choice if you have the option. Still, either account stands to save you money and make budgeting for medical costs easier.
|Health savings account (HSA)||Flexible spending arrangement (FSA)|
|Eligibility requirements||Eligibility requirements include having a high-deductible health plan (HDHP)||No eligibility requirements|
|Contribution limit||2018 contributions capped at $3,450 for individuals or $6,900 for families||2018 contributions capped at $2,650|
|Changing contribution amount||You can change how much you contribute to the account at any point during the year.||Contribution amounts can be adjusted only at open enrollment or with a change in employment or family status.|
|Rollover||Unused balances roll over into the next year.||With some exceptions, FSAs are “use it or lose it,” and you forfeit any unused balance.|
|Connection to employer||Your HSA can follow you as you change employment.||In most cases, you’ll lose your FSA with a job change. One exception: if you’re eligible for FSA continuation through COBRA.|
|Effect on taxes||Contributions are tax-deductible, but can also be taken out of your pay pretax. Growth and distributions are tax-free.||Contributions are pretax, and distributions are untaxed.|