What’s the difference between an HSA and FSA?

A health savings account (HSA) and a flexible spending account (FSA) have a lot in common, but they aren’t without their differences. Among other distinctions, an HSA requires the account holder to have a high-deductible health plan, while health insurance is unnecessary to open an FSA.

These accounts can play a big role in deciding which health insurance plan you enroll in, so it’s important to understand the pros and cons of each one.

SEE RELATED: HSA and FSA health resources

HSA

An HSA is a pre-tax savings account used for eligible health expenses. These include vision expenses like prescription glasses and contacts, in addition to medical and dental expenses like appointment copays and medication.

Account holders decide how much money to contribute before the year starts. Funds are then gradually withdrawn from an employee’s paycheck in equal installments throughout the year.

There’s one big requirement for an HSA: The account holder needs to have a high-deductible health plan (HDHP). An HDHP can be an HMO, PPO, POS (point of service) or EPO (exclusive provider organization) plan.

To classify as a high-deductible health plan in 2021, coverage needs to have deductibles of at least $1,400 (individual) and $2,800 (family). Out-of-pocket maximums cannot cap higher than $7,000 (individual) and $14,000 (family).

While an HSA can still be beneficial in the short term, it’s generally more useful over longer periods of time.

The key features of an HSA are:

• Contributions are not taxed and can be spent on HSA-eligible health expenses.

• The account holder needs to be insured with a qualifying high-deductible health plan (HDHP).

• The contribution limit doubles if more than one person is insured on the corresponding health plan.

• The annual contribution amount can be changed at any point during the year.

• All funds roll over to the next year at the end of the current one.

• All funds transfer if you change jobs.

SEE RELATED: How to check your HSA or FSA balance

FSA

Like its counterpart, an FSA is also a pre-tax account that can be spent on eligible health expenses. Money will also be automatically withdrawn from your paycheck in equal amounts.

Unlike an HSA, you do not need health insurance to open an FSA — but most people will be enrolled anyway. FSAs are commonly associated with a PPO, though not exclusively.

Due to its tight rollover and job-change restrictions, an FSA is best served as a short-term account handled year by year.

The key features of an FSA are:

• Contributions are not taxed and can be used to pay for eligible health expenses.

• Eligibility is open, so you can sign up with any type of insurance coverage — or none at all.

• The FSA contribution limit does not change, no matter how many people are associated with the account.

• The annual contribution amount cannot be changed after enrollment without certain qualifying life events.

• Funds typically do not roll over at the end of the year, unless your employer offers a partial rollover up to $550. Any money left over will need to be spent, or it will be lost and returned to the employer.

• Funds do not transfer if you change jobs. Any money left over will need to be spent or it will be lost and returned to the employer.

SEE RELATED: How do I enroll in an FSA?

Which is better — an HSA or an FSA?

On the surface, the overall freedom to shift and roll over funds offers the HSA a serious advantage. But it isn’t always that simple.

Comparing the two accounts is less like comparing apples to oranges, and more like comparing a red apple to a yellow apple. They may look a little different, and one is a little more popular, but both can be beneficial.

While the freedom of an HSA cannot be overstated, it does need to be associated with a high-deductible health plan. That can be a plus for some but a snag for others.

Since HDHPs require higher deductibles and out-of-pocket maximums, they tend to benefit younger and/or healthier people the most. Premiums will be lower, so covered individuals can keep their annual insurance costs low if they don’t require much medical care. Combined with the benefits of an HSA, that’s tough to beat.

But health care — and health in general — aren’t always predictable, and certain HDHPs can be very expensive for people who incur significant medical costs throughout the year.

Combined costs and savings are an important factor when you have the option of enrolling in a high-deductible, lower-premium plan with an HSA or a lower-deductible, higher-premium plan with an FSA.

FSA vs. HSA comparison chart

	Health savings account (HSA)	Flexible spending account (FSA)
Who is eligible?	Those with a qualifying high-deductible health plan (HDHP).	Anyone whose employer offers it. You do not need to have health insurance to open an account.
What are the contribution limits for 2021?	$3,600 for an individual; $7,200 for a family.	$2,750.*
Who contributes to the account?	The employee, the employer, or both.	The employee, the employer, or both.
Do unused funds roll over at the end of the year?	Yes.	Not traditionally, but an employer can choose to allow as much as $550 to roll over.
Who owns the account?	The employee.	The employer.
Can self-employed people qualify?	Yes, if they’re covered by an HDHP.	No.
What happens if I change jobs?	100% of the funds will be transferred to your new job.	None of the funds will be transferred.
Can I change my total contribution amount throughout the year?	Yes.	No, except in the case of certain qualifying life events and if your specific plan allows.
Can I withdraw money from the account?	Yes, but applicable taxes plus a 20% penalty will be withheld.	No.

Page published on Tuesday, August 13, 2019