Hand putting money into a piggy bank

Health Savings Accounts (HSAs) and flexible spending accounts (FSAs) are group benefits offered to employees that are similar in some ways. Both are accounts that allow you to make tax-free contributions to save for medical costs. However, there are several key differences between HSAs and FSAs.

What Is An HSA?

An HSA is a health savings account with tax advantages, used in combination with a high deductible health insurance plan. Funds accumulated in an HSA are used by the account holder for eligible medical expenses. To be eligible for an HSA, you must be enrolled in a qualified high deductible health plan, and it must be your only health plan. In 2018, the minimum deductible was $1,350 for an individual and $2,700 for a family. Yearly out-of-pocket expenditures for covered services were capped at $6,550 for an individual and $13,100 for a family.

Pros & Cons Of HSAs

HSAs have several advantages, including the following:

  • Contributions have a higher cap than FSAs.
  • You can change your contribution amount at any point during the year.
  • Unused balances in your account roll over into the next year.
  • If you change employment, your HSA can follow you.
  • Contributions are tax-deductible, and they can also be taken out of your pay pretax.
  • Distributions and growth are tax-free.
  • Accumulated savings can be withdrawn in retirement after age 65 without penalty.

The main disadvantage of HSAs is the eligibility requirement. You must be enrolled in a high-deductible health plan, and you are not eligible if you can be claimed as a dependent by someone else.

What Is An FSA?

Flexible spending accounts (also called flexible spending arrangements) are frequently offered by employers as part of a group benefits package. They are not linked to high-deductible health plans and can be used with any health insurance. Self-employed individuals are not eligible for FSAs. As with HSAs, employees contribute to FSAs from their gross pay, making the contributions tax free.

Pros & Cons Of FSAs

Advantages of FSAs include the following:

  • Withdrawals can be made for childcare as well as medical expenses.
  • There are no eligibility requirements. You do not have to have health coverage.
  • Contributions are pretax and distributions are not taxed.

FSAs have several cons when compared to HSAs, including the following:

  • The cap on contributions is lower ($2,700 for individual plans in 2019, as compared to a $3,500 cap for HSAs).
  • You can only change your contribution amount at open enrollment or with a change in family status, employer, or plan.
  • Generally, FSAs are “use it or lose it” plans. Any unused balance is forfeited at the end of the year.
  • Unless you are eligible for FSA continuation through COBRA, you lose your FSA with a job change in most cases.

HSA Or FSA – Which Is The Right Choice For You?

Both accounts have tax advantages and offer benefits to help you manage your out-of-pocket medical expenses. If you are eligible for an HSA, it may be a better choice because of the higher limits and triple tax benefits, because balances roll over into the next year, and because you can carry the account with you if you change employment. Feel free to speak with our friendly agent for professional assistance with your decision.