What is the difference between a flexible spending account and a health savings account?

May 10, 2023

Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are both tax-advantaged accounts that can be used for healthcare expenses, but they have several key differences:

1. Eligibility:

  • HSAs are only available to those who have a High-Deductible Health Plan (HDHP).
  • FSAs are typically available through employers, and there's no requirement to have an HDHP to be eligible.

2. Ownership and Portability:

  • HSAs are owned by the individual. You can take the account with you if you change jobs or health insurance plans.
  • FSAs are owned by the employer. If you leave your job, you can't take the FSA with you.

3. Roll-Over of Funds:

  • HSA funds roll over year to year. There's no "use it or lose it" policy.
  • FSA funds typically must be used by the end of the plan year. Some plans may offer a grace period or allow a limited amount to roll over.

4. Contribution Limits:

  • As of 2021, the contribution limit for HSAs is $3,600 for individuals and $7,200 for families. Individuals aged 55 or older can contribute an additional $1,000.
  • The FSA contribution limit for 2021 is $2,750 per year.

5. Tax Advantages:

  • Both FSAs and HSAs offer pre-tax contributions. However, HSAs also provide tax-free growth and tax-free withdrawals for qualified medical expenses.

6. Non-Medical Withdrawals:

  • For HSAs, if funds are withdrawn for non-medical expenses before age 65, a 20% penalty is applied and the withdrawal is taxed as income. After age 65, the penalty is waived but the withdrawal is still taxed as income.
  • FSAs do not allow non-medical withdrawals at all.

We are happy to discuss these with clients to help you make sure you are making the most of your benefits. We consider your individual health situation, financial needs, and employment status when helping you decide between an HSA and an FSA.