What’s the Difference Between an HSA and an FSA?

Depending on the health insurance plan  in which you are enrolled and the benefits your employer offers, you may be eligible for either a health savings account (HSA), a flexible spending account (FSA), a limited purpose flexible spending account (LPFSA) [add link], or a both an HSA and LPFSA.

While these plans may sound similar—and are both intended to help you pay for healthcare-related expenses—each account has different qualifications, advantages and  rules to learn, so it’s wise to research their various pros and cons before you choose which plan or plans are right for your situation.

Let’s look at how these plans work, and we’ll answer some of the common questions we get about these account types.

Health Savings Accounts (HSAs) vs. Flexible Spending Accounts (FSAs)

HSAs and FSAs may look similar at first glance, but they are very different in practice. While both are tax-advantaged savings accounts, there are key differences you should keep in mind as you evaluate each account type.

Qualifications to open an HSA or FSA

There are different rules and requirements for opening HSAs and FSAs.

You can enroll in a health savings account through your employer, if your employer offers this benefit, or through a financial institution of your choice, however, the IRS has certain qualifications you must meet.

IRS rules state that you can only contribute money to a health savings account if:

• You are enrolled in an HSA-qualified health plan, also known as a high-deductible health plan or HDHP
• You are not enrolled in another health plan that is not HSA-qualified. Examples of other coverage you may have:
  • Spouse’s health plan
  • Medicare
  • TRICARE
  • VA Benefits
  • Healthcare Flexible Spending Account (except limited purpose)
• You are not being claimed as a dependent on someone else’s tax returns

Meanwhile, FSAs are only offered through your employer, and you won’t be able to open an FSA on your own. The rules for enrolling in your employer’s FSA, if offered, are determined by the plan. You’ll need to contact your HR or benefits department for information about whether you are eligible to enroll.

Account ownership and portability

One of the most important differences between HSAs and FSAs is whether you own the funds in the account.

Specifically, a health savings account is an individually-owned account opened in your name, where you have full ownership of the funds in the account. The funds in your HSA will never expire (there’s no “use it or lose it”), and any money you contribute to the account will stay in your name even if you change jobs, health insurance or retire.

On the other hand, flexible spending accounts are owned and managed by the employer offering the plan. As such, any money you or your employer deposits into and FSA won’t follow you if you change jobs. Additionally, the plan rules determine how long you have to spend the money in the account, and what amount, if any at all, can be rolled to a future year.

Because of this key difference in account ownership, it really comes down to saving versus spending. While both account types can help you save on healthcare by allowing you to pay with pretax dollars for the expenses you have today, only health savings accounts can be used to save money for the long term whereas flexible spending accounts are spent on healthcare costs you may have throughout the year.

Qualified health expenses you can spend your money on

Both HSAs and FSAs allow you to save money by paying for healthcare expenses on a tax-free basis.

The list of eligible healthcare expenses for HSAs is determined by the IRS. In order to receive HSA funds tax-free, it is important to reimburse only qualified medical expenses, which can include, but aren’t limited to, ambulance rides, bandages, dental treatment, doctor visits, eyeglasses, hospital stays, prescription and nonprescription medications, therapy and many other “common” healthcare expenses.

The eligible expense list for an FSA varies from plan to plan. In general, a standard (non-limited purpose) FSA will allow you to reimburse the similar expenses to those you can reimburse with an HSA, however, it is important to check your plan’s rules. A limited-purpose FSA is exactly what it sounds like – it has a limited expense list and can be used only for dental and vision expenses. Since the limited expense list does not include healthcare expenses, you are allowed to enroll in both a limited-purpose FSA and an HSA, if both are offered by your employer.

If you’re unsure about whether an expense is eligible for your plan(s), it’s generally wise to speak to your plan administrator. In most cases, they can direct you to a specific list of qualified expenses or provide some additional advice on how you can best take advantage of the funds in your account.

Contribution limits

Another key difference between HSAs and FSAs is how much money you can contribute to your account each year. These limits are important because they represent the maximum amount of money you can save each year to pay for healthcare expenses on a tax-free basis.

As mentioned above, HSA funds belong to you and never expire. This means you’re incentivized to max out your HSA contribution every year to accumulate a larger balance as well as maximize your tax savings. See current HSA contribution limits here.

While you’ll want to maximize your contributions to your HSA in almost all cases, it’s generally wise to be more careful with the amount of money you contribute to your FSA. Any money you contribute to your FSA that has not been used by deadline for that plan year and that cannot be rolled over will be forfeited. This means that you’ll have to plan in advance how much you’d like to contribute based on what you believe you will spend in the given year. We have a helpful worksheet that can help you estimate your expected healthcare costs and choose your FSA contribution amount. Further, you can only establish your annual contribution amount for your FSA during the annual enrollment period and you won’t be able to change your election, except in very limited circumstances. The maximum amount you can contribute to your FSA depends on your plan. You’ll need to confirm the maximum contribution amount with your HR/Benefits department.

Tax incentives

HSAs and FSAs offer advantages that can make them valuable accounts for reducing your taxable income. The IRS will deduct any money you contribute to your HSA or FSA account from your taxable income for the year, leading to significant tax savings over time if you maximize your contributions each year. Further, you can take money out of these accounts tax-free, provided you spend the funds on qualifying expenses.

HSAs offer a third tax benefit that FSAs cannot – tax-free growth. Earnings you receive in your account from interest and/or investments (if offered by your administrator) are also received tax-free, allowing for even greater growth. This means that the HSA is triple-tax-advantaged – money is contributed tax-free, grows tax-free, and is received tax-free when used to reimburse eligible healthcare expenses.

Saving for retirement

Financial experts have estimated that the average couple retiring in 2022 will spend approximately $315,000 on healthcare expenses throughout their retirement. It’s easy to see why having a tax-advantaged savings account specifically for healthcare expenses can be a good idea.

For all the reasons we have discussed, HSAs are a great option for saving money over time to be used in your retirement. In fact, once you’re enrolled in Medicare, your eligible expense list grows to include expenses for:

• Medicare Part B Premiums
• Medicare Part D Premiums
• Home Healthcare
• Long-Term Care Expenses

Also, after you turn 65, you can use your HSA funds for general living expenses, however, you will need to pay income tax on amounts not spent on qualifying expenses, but you will not have to pay the penalty that applies before age 65.

While FSAs aren’t a great savings vehicle for retirement income or expenses due to the use-it-or-lose-it rule, they can still help. Enrolling in a limited purpose flexible spending account (if offered by your employer) coupled with an HSA can help you pay for dental and vision expenses today so you can retain more money in your HSA for the future.

HSA and FSA frequently asked questions

Below, we’ll answer a few questions you may have about HSAs and FSAs.

Before you enroll, you should speak with a financial and/or tax professional who has reviewed your situation before making any decisions about your accounts.

Can I have both an HSA and an FSA?

It depends.

Standard FSAs – Enrolling in a standard FSA that reimburses healthcare expenses will disqualify you from contributing money to an HSA, meaning you can’t fund an HSA while you’re covered by a standard FSA. However, any funds you previously contributed to your HSA will remain in your account and under your control, even if you start a new job with an FSA that does not allow you to continue to contribute to the HSA.

Limited Purpose Flexible Spending Account (LPFSA)s – These accounts cover eligible dental and vision expenses only, making them compatible with HSAs. Funding an LPFSA will not disqualify you from making contributions to an HSA and can be a great way to maximize your tax savings.

If you think your accounts may conflict with each other, you should consult with your financial and/or tax advisor to ensure you’re following all applicable laws.

Is having an HSA better than having an FSA?

Not necessarily. The best account or account(s) for you depends on your needs and goals.

Your financial and/or tax advisor can help you choose the financial tool that’s most applicable to your current situation and to help further your financial goals.

Summary

We hope that this article has helped you better understand the differences between HSAs and FSAs. If you have any remaining questions, we encourage you discuss your situation with your financial and/or tax advisor.

If you’re a current Associated Benefits Connection® participant and you’d like assistance with your account, contact Participant Services at 800-270-7719 or Participant.Services@AssociatedBank.com. And you can always schedule an appointment online.