Difference between health savings account and flexible spending account – Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are both types of accounts that allow individuals to save pre-tax money to pay for eligible healthcare expenses, but they have some key differences. Here’s a detailed comparison in a table format:
| Feature | Health Savings Account (HSA) | Flexible Spending Account (FSA) |
|---|---|---|
| Eligibility | Must be enrolled in a High Deductible Health Plan (HDHP). | Available with any health plan through an employer. No specific plan requirements. |
| Contributions | For 2023, the contribution limit is $3,850 for individuals and $7,750 for families. | For 2023, the contribution limit is $3,050 per employer. |
| Ownership | Owned by the individual and can be carried from one employer to another. | Owned by the employer; not transferrable if you change jobs. |
| Rollover | Unused funds roll over year to year without any limit. | Generally, funds must be used within the plan year. Some plans allow a rollover of up to $610 or a grace period. |
| Investment Options | Funds can be invested, and earnings are tax-free if used for qualified medical expenses. | No investment options. Funds are not invested. |
| Withdrawals | Tax-free withdrawals for qualified medical expenses. Penalties apply for non-qualified expenses. | Tax-free withdrawals for qualified medical expenses. No penalties, but funds must be used or they are forfeited. |
| Tax Benefits | Contributions are tax-deductible, and withdrawals for medical expenses are not taxed. | Contributions are pre-tax, reducing taxable income. |
| Portability | Funds remain with the individual even when changing employment or retiring. | Funds generally must be used within the plan year or shortly thereafter, depending on plan-specific rules. |
| Flexibility in Use | Can be used for a broader range of health-related expenses. | Some plans may restrict the type of expenses that qualify more than HSAs. |
| Employer Contributions | Employers can contribute, but it’s not required. Contributions count toward the annual limit. | Employers can contribute, and this does not count toward the annual limit set for employee contributions. |
| Availability | Available to individuals, whether self-employed or employed. | Only available through an employer that offers the plan. |
Detailed Explanations:
- Eligibility:
- HSA: To open and contribute to an HSA, you must be enrolled in a High Deductible Health Plan (HDHP). This is defined by certain criteria, including minimum deductibles and maximum out-of-pocket expense limits.
- FSA: Any employee whose employer offers an FSA can participate, regardless of the health plan they are enrolled in.
- Contributions:
- HSA: The IRS sets annual contribution limits. Individuals over 55 can make additional “catch-up” contributions.
- FSA: Contribution limits are lower than HSAs, and there are no catch-up contributions for older individuals.
- Rollover:
- HSA: There is no time limit on when the funds must be used, allowing an HSA to grow over time and potentially provide a source of tax-free funds for medical expenses in retirement.
- FSA: Typically, you must use the funds within the plan year. Some plans offer a grace period or allow a limited amount of funds to roll over to the next year.
- Withdrawals:
- HSA: Funds can be withdrawn at any time for qualified medical expenses. Withdrawals for non-medical expenses are subject to taxes and penalties if taken before age 65.
- FSA: Funds must be used for qualified medical expenses within the plan year; otherwise, they are forfeited unless your plan allows for a grace period or rollover.
Both HSAs and FSAs offer significant tax advantages and can reduce your overall healthcare costs. However, the choice between them often depends on your specific health insurance plan, financial goals, and the stability of your employment.