What's the Difference Between a FSA and HSA?
An easy comparison between a Health Savings Account (HSA) and Flexible Spending Account (FSA) is the difference between leasing and buying a car. You need to consider who owns it, when access is gained and what happens at the end of the plan year or lease. The benefit of these funding vehicles is the tax savings advantage for qualified eligible out-of-pocket healthcare expenses as outlined by the IRS here.
There are three main differences to these two accounts:
- Timing to access funds
- Flexibility in funding
When you lease a car, you make monthly payments until your lease is up and then you return the car to the dealership. This is similar to how a FSA works. You make an annual election that’s broken down into the number of pay periods for that year. This election generally can’t be changed (unless there's a qualifying event). You don’t own the FSA and at the end of the plan year any unused funds are forfeited. The biggest benefit of the FSA is that you have access to your annual elected amount (for qualified eligible medical, dental and vision expenses) before all your deductions have been deducted and placed in the FSA for that year.
On the other hand, when you purchase a car, you can pay with a lump sum of cash or make monthly payments. You own the car once it’s paid for, and it’s yours forever. This is similar to owning a HSA. You own your bank account and can keep that account even if you leave your employer or decide not to spend that money for many years. Unlike the FSA, you can’t reimburse yourself for qualified eligible expenses unless the account is prefunded. However, as long as your HSA is opened prior to incurring healthcare costs, you can deposit funds into your HSA at any time in the future to reimburse yourself for those prior expenses. You also have the flexibility to change your payroll deductions or direct deposits during the year.
There are different maximums for a HSA and FSA which can change annually per the law. You also may be available to participate in both accounts if your employer offers a Limited Purpose FSA (non-medical) with a HDHP/HSA. For more information, contact your Assurance representative.
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