FSA vs. HSA: What's the Difference?

Flexible Spending Arrangements (FSAs) and Health Savings Accounts (HSAs) are both federal programs that enable you to save pre-tax money for medical expenses. By having contributions go directly to your account, you can save and use this money without ever paying taxes on it. These savings can be used for co-pays and deductibles, of course, but they can also be used for many items that might surprise you, including:

• First-aid supplies
• Reading glasses and prescription sunglasses
• Dental fillings, x-rays, extractions, dentures, braces
• Feminine hygiene products, lactation supplies, baby monitors
• Over-the-counter (OTC) pain relievers, acne medications, sunscreen with an SPF of 30 or greater
• Home vent cleaning with a medical diagnosis
• Form completion fees charged by providers
• Medical-related parking fees and bus or taxi fares

FSAs and HSAs are funded by you, your employer, or both of you, but you can only be enrolled in one of these medical-savings programs at a time. The two plans have annual contribution maximum limits, and regardless of which one you choose, you should have a system for saving your eligible receipts, prescriptions, Explanation of Benefits (EOB) statements, and bills.

How do FSAs differ?

All employees, excluding self-employed workers, are eligible to contribute to an FSA whether they are enrolled in a healthcare plan or not. Expenses must be paid, then a reimbursement request form is filed along with receipts. The plan allows you to be reimbursed for qualifying expenses that do not exceed the total amount you have elected to contribute by the year’s end. For example: If you are contributing $50 (pre-taxed dollars) every bi-monthly paycheck, you are eligible to claim a maximum cumulative total of $1,300 for the year. Even if it is only March 31 and your six contributions to date equal $300, you can still request reimbursements up to $1,300. Once you have been reimbursed $1,300, you are done making claims for the year.
 
FSA accounts are employer-owned, so they are use-it-or-lose-it plans. If you save more than you spend, those contributions will be forfeited at the end of the year or if you leave your job. Employers can choose to honor a grace period of up to 2½ months and a carryover amount of up to $500 to cover expenses incurred during the following year.
 
There are actually three types of FSAs:

• Healthcare (for medical expenses)
• Dependent Care* (for care of dependents age 12 or less, or disabled dependents of any age)
• Limited Purpose* (or LPFSAs, for additional vision and dental purposes only)

* These last two are “HSA-compatible,” meaning that you are allowed to contribute to these two specific plans while you are also contributing to an HSA.

How do HSAs differ?

First, to be eligible to enroll in an HSA, you must be covered by a High-Deductible Health Plan (HDHP), but not have any other coverage, including Medicare. You cannot be claimed as a dependent by anyone else, either. So, how high is a high deductible? Per the IRS, in 2020, deductibles of an HSA-qualifying HDHP need to meet the following requirements:
 
For individual coverage:

• Minimum annual deductible of $1,400
• Maximum annual deductible and other out-of-pocket expenses totaling $6,900

For family coverage:

• Minimum annual deductible of $2,800
• Maximum annual deductible and other out-of-pocket expenses totaling $13,800

Only HSA amounts that have already been contributed by you and/or your employer can be used. A debit card with the current contribution value is issued and can be used to make payments.
 
HSA accounts are employee owned, so unused contributions are not lost at the end of the year. They are “portable,” so they carry over into subsequent years and will follow you from job to job and into retirement. At the age of 65 or more, contributions can be withdrawn without penalty for non-medical expenses. Individuals must report HSA contributions on IRS Form 8889.
 
HSA accounts earn interest, but some plans offer the option to invest contributions, or a portion of them, in stocks or funds to potentially earn higher interest, tax-free.

Which plan is best?

It depends. If you have chosen a low-deductible healthcare coverage plan because you anticipate many doctors’ visits and/or prescriptions, or an upcoming surgery or pregnancy throughout the year, an FSA may be right for you. Conversely, if you have chosen a qualifying HDHP because you do not anticipate having many doctor visits or medical expenses in the next year, an HSA might serve you well.

Compare differences below to make the best decision for you.
 

	FSA	HSA
Who's eligible?	All employees, even those not enrolled in a healthcare plan; self-employed workers are not eligible.	Employees and self-employed workers who are enrolled in an HDHP.
Who owns the account?	Employer — FSAs are “use-it-or-lose-it” plans.	Employee — Contributions travel with employee from job to job and into retirement. They can also be used for non-medical expenses at age 65 or older.
Contribution maximums?	For 2019: $2,700.	For 2020: $3,500 (individual), $7,100 (family). Those 55 years of age or older may contribute an additional $1,000.
When are contributions available?	The total amount of the entire year’s scheduled contributions is available immediately upon enrollment.	Plan amounts are available after they have been contributed.
Do contributions earn interest?	No.	Yes — Plus, employees may choose to invest all or part of the contributions in stocks and funds.
How are contributions disbursed?	Reimbursements are made after request form is filed with expense receipts.	Account value is loaded to a debit card that can be used for payments.
Can the contribution rate be changed during the year?	No. Rate is locked-in during an annual open enrollment period. Changes can be made if a major life event occurs.	Yes.