What is the difference between an Flexible spending accounts (FSAs) and health savings accounts (HSAs)?
Flexible spending accounts (FSAs) and health savings accounts (HSAs) have a lot in common. Both allow you to save money that you can later use to pay for qualified medical expenses, and both also have tax-related advantages. However, there are several key differences between the two. We have outlined the most important distinctions below.
A medical FSA is established by one’s employer. Funds deposited into this type of account are typically pre-tax payroll deductions, though the employer themselves may also contribute. While contributions to the account are deducted from each paycheck over the course of the year, the full amount for that year is typically available for withdrawal immediately or after the first contribution has been made. If an employee uses all of the funds in their account and then leaves the company or is fired before the end of the year, they do not need to pay those funds back to the employer.
Flexible spending accounts can be used in conjunction with any type of health insurance, and you don’t even need to be insured to open one. Funds deposited in an FSA can be used to pay deductibles, copays, coinsurance, and qualified medical expenses not covered by health insurance. They can also be used to purchase over-the-counter medications so long as you have a doctor’s prescription. One of the most important things to note about FSAs is that little – if any – of the funds in them will carry over to the following year. Some employers will allow enrollees to carry over up to $500 from one year to the next, but for the most part, any money not used by the end of the year (or by mid-March if a grace period is offered) will be forfeit. Many employers will offer a carry-over option or a grace period, but not both.
A health savings account (HSA) can be established by an employer or by an individual. However, unlike a medical FSA, this type of account must specifically be established in conjunction with a qualified high-deductible health plan (HDHP). These accounts can be funded using pre-tax employee payroll deductions or employer contributions, much like an FSA. However, with a health savings account, an individual can also make contributions on their own. While an HSA can only be established and contributed to while the account holder has a qualified HDHP, you will still be able to withdraw funds even if you choose to drop your HDHP. Additionally, if your account was established by your employer, it will follow you even if you leave the company, regardless of whether or not your employer had previously been making contributions to it.
The funds placed in a health savings account can be used for the same types of expenses as those in a flexible spending account. However, one of the major differences between the two types of accounts is that the funds in an HSA will remain available from one year to the next if they are not used. Any money withdrawn from an HSA for medical expenses will not be taxed, though funds withdrawn for non-medical reasons will. There is also an additional 20% penalty charged for non-medical withdrawals prior to the age of 65.
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