Distinguishing Flexible Spending Accounts (FSA) from Health Savings Accounts (HSA)
Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) are both popular tools for managing healthcare expenses, but they have key differences that individuals should consider when selecting the most suitable option for their needs.
1. Eligibility and Ownership
FSAs are typically offered by employers as part of their employee benefits package. Employees contribute a portion of their pre-tax income to the FSA, which can then be used to cover eligible healthcare expenses incurred during the plan year. Employers may also contribute to employees' FSAs, but they are not required to do so.
In contrast, HSAs are available to individuals who are enrolled in a high-deductible health plan (HDHP). Both employers and employees can contribute to an HSA, and contributions are tax-deductible. Unlike FSAs, HSAs are owned by the individual, meaning the account stays with them even if they change jobs or health insurance plans.
2. Contribution Limits and Rollover
FSAs have an annual contribution limit set by the IRS, which may vary from year to year. Unused funds in an FSA typically do not roll over at the end of the plan year and may be forfeited, although some plans allow for a grace period or a limited carryover amount.
HSAs also have annual contribution limits set by the IRS, but contributions can accumulate and roll over from year to year. This means that individuals can build savings in their HSA over time to cover future healthcare expenses, including those in retirement.
3. Withdrawals and Tax Treatment
Withdrawals from both FSAs and HSAs are tax-free when used for qualified medical expenses. However, there are differences in how funds can be accessed and used.
FSAs usually provide participants with a debit card or reimbursement process for accessing funds to pay for eligible expenses. HSAs, on the other hand, often come with a debit card and/or checks, allowing individuals to pay for expenses directly or reimburse themselves from the account.
In summary, while both FSAs and HSAs offer tax advantages for covering healthcare costs, they differ in eligibility, ownership, contribution limits, rollover rules, and withdrawal methods. Understanding these distinctions can help individuals make informed decisions about which account best meets their healthcare and financial needs.
References:
- Internal Revenue Service (IRS). (n.d.). Health savings accounts and other tax-favored health plans. Retrieved from https://www.irs.gov/pub/irs-pdf/p969.pdf
- U.S. Department of Labor. (n.d.). Health flexible spending arrangements (FSAs). Retrieved from https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/health-flexible-spending-arrangements-fsas
- Healthcare.gov. (n.d.). Health savings accounts (HSAs). Retrieved from https://www.healthcare.gov/glossary/health-savings-account-HSA/