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Flexible Spending Account vs. Health Savings Account

Health insurance 101 terms to know

You might have a flexible spending account (FSA) or a health savings account (HSA), but you might not know how you can use it to your advantage. Or you might be deciding whether you want an FSA or an HSA. To help you decide which option is the best for you and how to get the most out of these accounts, here are some of the differences between them.

fsa vs hsaWhat is an HSA?

An HSA is a qualified trust or account that you set up with an HSA trustee – such as a bank – in which you can set aside pre-tax dollars to use toward qualified medical expenses. Your employer may also make contributions, if offered. You can only sign up for an HSA if you have a qualifying health plan. This may be an HDHP plan offered through your employer or an HSA-eligible plan offered through the health insurance marketplace.

HSAs offer you a triple-tax advantage:

  • Contributions are tax free and lower your taxable income
  • Earnings on the account are untaxed
  • Account withdrawals on eligible medical expenses are untaxed

Unlike an FSA, your HSA is not tied to your employer or your health plan and rolls over, meaning you don’t lose any money at the end of the year.

What is an FSA?

An FSA is an employer-sponsored plan that lets you to set aside pre-tax money from each paycheck to pay for eligible medical expenses. Your employer may also contribute to your FSA, if offered. However, unlike an HSA, the funds in your FSA do not roll over year over year and must be used by the end of your plan year, unless you have a grace period.

There are three kinds of FSAs:

  • Medical Flexible Spending Account (medical FSA)
    A medical FSA can be used to pay for eligible medical expenses, such as deductibles, copayments, dental and vision care. A medical FSA is not available with an HSA-eligible HDHP.
  • Limited-Purpose Flexible Spending Account (LPFSA)
    An LPFSA is like a medical FSA but used only for dental and vision expenses. You can only have an LPFSA if you have an HSA-eligible HDHP.
  • Dependent Care Flexible Spending Account (DCFSA)
    A DCFSA is like medical FSA and LPFSA plans but is used for dependent care expenses for a child younger than 13, a disabled spouse or a parent in eldercare. A DCFSA is available to pair with any plan type.

FSA and HSA-eligible expenses

Now that you know some of the basics about FSAs and HSAs and what may be available to you, here are some expenses you can use your FSA or HSA funds for:

  • Deductibles and copayments, but not for insurance premiums
  • Prescription medications, as well as over-the-counter (OTC) medicines with or without a prescription
  • Medical equipment and supplies like crutches and bandages
  • Diagnostic devices like blood sugar test kits

You can see a more complete list of qualified medical expenses here.

Which one should I choose?

Whether you choose an FSA or an HSA will depend on your plan and your individual healthcare needs. Do you want a plan with a high deductible so that you can get an HSA, or do you prefer a lower deductible with an FSA option? Take some time to think about the differences between these types of accounts to decide which one will be the best option for you.

More information

For more information on HSAs and FSAs, visit the Internal Revenue Service’s (IRS) website here.

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Posted: February 23, 2022