While people often set up automatic deposits from their paychecks to a savings account or 401(k), there are other ways to save as well. Many companies offer flexible savings accounts (FSAs) and health savings accounts (HSAs).
But how do you know which one is right for you?
What is an FSA, and what are its benefits?
A health-care flexible spending account (FSA) allows you to set aside a portion of your pretax income for eligible medical, dental and vision expenses. In 2023 the IRS threshold amount was $3,050.
The money placed in an FSA can be used immediately on qualified expenditures like medical bills, over-the-counter medicines, and health-related supplies, though it varies with the plan. You won’t have to pay taxes on what you set aside in the account. For example, if your employer offers an FSA and you set aside $500 from your pretax income each year, that amount is not subject to taxes.
And what is an HSA? Does it have similar benefits?
A health savings account (HSA) is a tax-free savings account paired with a high-deductible health plan, which allows you to set aside money each year for medical, dental and vision expenses. In 2023 the threshold amount was $3,850, with an additional $1,000 per year for those age 55 or older and not enrolled in Medicare.
This money can be used at any time tax free and, unlike an FSA account, it also rolls over to the next year. It’s yours to keep and use now or in the future. Most medical expenses should be eligible for reimbursement through the HSA.
What’s the biggest difference between an FSA and an HSA?
Both FSAs and HSAs allow you to benefit from reduced taxes while saving money on health-care costs. However, they’re very different when it comes to how long you can use the money you invest in them.
An FSA has a “use it or lose it” policy, so anything left in the account at the end of the plan year may be forfeited. You may be allowed to roll over a limited amount of leftover funds into the following year. For example, you could roll over up to $610 in 2023. An HSA allows people to save money over time, since there’s no annual term limit or expiration date. Generally, everything saved in an HSA can stay there for future use. Contributions can only be made to the HSA as long as you remain HSA eligible.
How do you know if you’re eligible for an FSA or HSA?
Figuring out if you’re eligible for an FSA or HSA might seem intimidating at first. An FSA is usually tied to a higher-coverage health insurance plan and can only be used on eligible medical expenses. To get an HSA, you’ll need to be enrolled in a federally qualified high-deductible health plan, not enrolled in Medicare or Tricare, and not claimed as a dependent on someone else’s tax return.
Can you have both an FSA and an HSA?
In many cases, it isn’t possible to have both an FSA and an HSA at the same time. You actually may receive a penalty if you have both covering overlapping expenses. While some people can pair a limited-purpose FSA with their HSA, most need to choose between conventional FSAs and HSAs. Limited-purpose FSAs can only be used for dental or vision expenses until you’ve met the IRS statutory deductible. After you’ve met the deductible, you can use the remainder of the funds for qualified medical expenses.
HSA vs. FSA: Why would someone choose one over the other?
First and foremost, it depends on your eligibility. Then, it all depends on how you want to budget. Remember that an HSA specifically allows the account holder to pay for qualifying medical, dental or vision expenses with pretax dollars. Money in an FSA can only be used on a list of qualified medical, dental or vision expenses specified by the IRS.
While an FSA has less flexibility than an HSA, its benefits are typically provided without any employee contribution, while HSAs require employer/employee contributions.
What may help you choose between them is knowing what each account offers, such as benefits like online payment access or associated debit cards that allow you to pay for qualifying expenses with ease. Understanding what you qualify for and what would best benefit you can help make the decision easier when deciding which account to open.
Also, if you’re self-employed and covered under a qualified health plan, you may be able to contribute to an HSA but not an FSA.
How do you sign up for an FSA or HSA?
The sign-up process for either account is usually simple but will differ depending on what type of plan is offered by your employer. Some employers offer both options, giving you a choice between the two. Be sure to ask your Human Resources or benefits team if you want more information on what kinds of plans are available at your company.