What’s the Difference between an HSA and an FSA?

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) both help you reduce your taxable income by putting money away for healthcare expenses. However, there are some major differences between the two.

Generally speaking, an FSA allows you to elect at the beginning of a plan year the total that you want to set aside from your pay for the whole plan year to spend on IRS-qualified healthcare expenses. The tax-exempt funds are saved and spent on a year-by-year basis. This is why they are referred to as “use-it-or-lose-it” accounts. FSAs are great for saving funds you know you’ll use by the end of the plan year.

An HSA is also to be used for IRS-qualified healthcare expenses, but it is a longer-term account. HSAs are available to anyone covered by an IRS-qualified high deductible health plan (HDHP). As long as you are covered by an HDHP, you can contribute to your HSA throughout the year in whatever increments you choose, up to an annual maximum.

The HSA funds stay with you, even if you leave the HDHP plan, until you spend them – including through retirement. And after age 65, you can use the funds for anything at all. You won’t pay tax on IRS-eligible healthcare expenses, but any other expenses will be taxed as income.

A few more differences:

• FSAs are employer-sponsored plans, and HSAs are owned by you. Therefore, when you change employers, you can take the HSA with you, but any funds contributed to your FSA generally must be spent.
• You can open an HSA even if it isn’t offered by your employer. You’re allowed to contribute to an HSA as long as you have an HSA-eligible health insurance policy.
• HSAs are not “use it or lose it.” Unspent funds remain in an HSA, year after year through retirement. With FSAs, you must spend the money by the end of the year (or carryover period, if offered by your employer).
• You can change your regular contribution amounts to your HSA at any time throughout the year if you decide you need to put away more or less. FSA contributions are set at the beginning of the plan year and cannot be altered except in cases of a qualifying event.
• You can invest HSA funds. You can keep a minimum amount in the cash account and then invest the rest in mutual funds to grow over the long term.
• With HSAs, you have an unlimited amount of time to reimburse yourself. You can withdraw the money for eligible expenses at any time. With FSAs, you must submit receipts by a deadline in order to substantiate the expenses as eligible per IRS requirements.

Your healthcare needs and insurance plan will help determine whether an HSA or FSA is the best fit for you. You may even be suited for both, in which case the FSA would be a “limited purpose” FSA for specific needs like dental, vision or dependent care. You can learn more about HSAs in the video below.

Ferne Emery is an account manager with Pinnacle's Health & Benefits team. She is located at Pinnacle's Premier office in High Point, NC, and can be reached by phone at (336) 881-3209 or by email at Ferne.Emery@pnfp.com.