An FSA (Flexible Spending Account) and an HSA (Health Savings Account) are both types of tax-advantaged accounts in the United States that can be used to save money for qualified healthcare expenses. However, they have some key differences:
Eligibility and Ownership:
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- FSA: FSAs are typically offered by employers as an employee benefit. Employees can contribute to an FSA, and employers may also contribute, but the account is owned by the employer. Employees have access to the funds from day one of the plan year.
- HSA: HSAs are available to individuals with a High Deductible Health Plan (HDHP) as their primary health insurance coverage. HSAs are owned by the individual, and both employers and employees can contribute to the account. The individual retains ownership of the HSA even if they change jobs or health plans.
Contribution Limits:
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- FSA: The IRS sets annual contribution limits for FSAs. The annual contribution limit was $3,850 for a Health FSA. Employers may also set their own contribution limits within this IRS limit.
- HSA: The IRS sets annual contribution limits for HSAs. As of my last knowledge update in 2021, the annual contribution limit for an HSA was $4,150 for individuals and $8,300 for families.
Rollover of Funds:
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- FSA: Generally, most of the funds in an FSA must be used within the plan year or a short grace period (usually 2.5 months) after the plan year ends. There may be a small rollover option (up to $500) or a grace period, but not both, depending on the employer’s plan design.
- HSA: HSAs offer more flexibility in that funds can be rolled over from year to year, and there is no “use it or lose it” rule. This means that the money in your HSA can continue to grow tax-free over time and can be used for future healthcare expenses.
Account Portability:
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- FSA: If you change jobs or health plans, you generally cannot take your FSA funds with you. You may be eligible for COBRA continuation coverage, but this is limited.
- HSA: HSAs are portable, and you can keep your HSA and its funds even if you change jobs or health plans.
Tax Treatment:
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- FSA: Contributions to an FSA are made with pre-tax dollars, reducing your taxable income. Withdrawals used for qualified healthcare expenses are tax-free.
- HSA: Contributions to an HSA are also made with pre-tax dollars, reducing your taxable income. Additionally, withdrawals for qualified healthcare expenses are tax-free. HSA contributions may also be invested, and any earnings from investments are tax-free if used for qualified medical expenses.
It’s important to note that both FSAs and HSAs have specific rules and regulations, and these can change over time. Before opening or using one of these accounts, it’s a good idea to consult with a financial advisor or benefits specialist to understand the most up-to-date rules and how they apply to your specific situation.
