Health savings accounts and flexible spending accounts are tax-advantaged financial tools that can help you save money on medical expenses.
These accounts can be great ways to put money away for both medical emergencies and routine health care expenses. But each account also has unique advantages and disadvantages.
And you may not have the luxury of choosing between one account or the other. You need a high-deductible health plan to open an HSA, and you need an employer-sponsored FSA that can fund it.
But if you have the option to open one or both of these accounts, here’s what you need to know.
Key Differences Between HSAs and FSAs
The key differences between HSAs and FSAs are how they are funded and to whom each account is available.
“A health savings account is linked to a high-deductible health plan, and you can have it through your employer or you can have it as a self-employed person,” Charlene Rhinehart, CPA and personal finance editor at GoodRk, tells CNBC Make It.
Funds in your HSA roll over each year, and you can take your account with you if you change jobs, Reinhart says. When the latter happens, you’ll have the option to leave your HSA where it is, roll it into a new employer-provided account, or switch it entirely to a new HSA provider, according to Fidelity.
However, there are contribution limits. In 2024, individuals can contribute up to $4,150 to their HSAs. Families covered by the same plan can contribute up to $8,300. People 55 and older can contribute an additional $1,000.
In general, HSAs come with more flexibility because you can open an account regardless of your employer, as long as you have a high-deductible health insurance plan. Additionally, you have the option to invest your HSA funds, and if you never use them, they will be transferred to your beneficiary upon your death.
“[An] FSA is completely different in that way,” Reinhart says. “The funds don’t come back every year, there’s a deadline [and it’s] ‘use it or lose it’ type of account.”
Some FSA funds can roll over into the new year, but that depends on your plan sponsor, according to FSAStore. Plan sponsors may allow FSA beneficiaries one of the following options:
- Transferability of up to $640 for plans starting in 2024
- A 2.5-month grace period that allows account holders to use FSA funds from the previous year until March 15 of the following year
There are also FSA contribution limits of $3,200 for individuals in 2024, according to the Internal Revenue Service. If you are married or have dependents, you can use the funds to pay for their health care costs as well, but the contribution limit remains the same. If your spouse can open their own FSA, they can contribute up to $3,200 to their account, according to Healthcare.gov.
Both FSA and HSA contributions use pre-tax dollars, and when you spend the funds on qualified medical expenses, they are also tax-free. If you invest your HSA funds, the earnings are also tax-free, giving the HSA a triple tax advantage.
The qualified medical expenses you can use for HSA or FSA funds are generally the same. You can use the funds to cover co-pays for doctor visits, over-the-counter and prescription drugs, eyeglasses, dental care, and more.
“Your HSA custodian doesn’t manage your HSA expenses like your FSA will,” Reinhart says. “You will need to submit your receipts to your FSA custodian so they can reimburse you.”
She says it’s a good idea to keep receipts when you use HSA funds just in case you’re ever audited.
Which account is right for you?
An HSA comes with more benefits than an FSA, but requires you to maintain a high-deductible health plan. Under these insurance plans, your monthly premium will be lower than a traditional plan, but you pay more out of pocket before your insurance provider begins to cover the costs.
“Think of it as a question of when you want to pay.” [medical] costs,” says Reinhart. “You can pay a higher cost each month when you pay your insurance premiums, and that means that when something comes up, your insurance company will cover more of the cost right away.”
If you’re a generally healthy person and don’t see doctors often, Reinhart says a high-deductible plan might be a better fit for you. On the other hand, if you or your child have frequent medical expenses, it may be wise to use a standard plan.
With a standard plan, you can still top up an FSA if it’s available to you, so you can get some tax savings when it comes to your health care costs.
“You really have to take into account what happened this year, what you expect to happen next year, and what your financial situation looks like to choose the best health plan for you,” Reinhart says.
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