What’s the difference between an FSA and an HSA?

Here’s how to navigate medical savings accounts so you can save money.

Out-of-pocket medical expenses can add up quickly. One way you can save money is to set up a special kind of health care account that reimburses you for eligible medical expenses.

The Internal Revenue Service (IRS) makes the rules for these accounts — and the guidelines and restrictions can be a bit complicated to navigate.

What these special health accounts have in common is that they allow you to set aside pretax money to pay for eligible medical expenses. Pretax money means you don’t have to pay income tax on the contributions. That’s where the savings comes into play: You save the money you would have had to pay in income taxes.

Let’s look at 2 types of medical savings accounts — a flexible spending account (FSA) and a health savings account (HSA) — in more detail, including how they differ from each other.

Thinking about health insurance? Call a licensed insurance agent at (800) 827-9990 to talk about plans, or browse your options online today.

What is a flexible spending account?

If you have a health insurance plan through a job, your employer may offer a flexible spending account as a benefit.

If you have an FSA, depending on the limit that your employer sets, you can put up to $3,300 of pretax money into it each year to pay for qualified medical expenses for you, your spouse (if married), and any dependents. A spouse can also contribute up to their employer’s FSA plan limit (maximum $3,300) per year. Your employer may contribute to the account, but they don’t have to.

If you participate in an FSA, your employer takes the money out of your paycheck and puts it directly into your FSA. When you spend money on eligible medical expenses (see below), you submit a claim and are reimbursed from the account. Alternatively, your employer may issue you an FSA card with funds preloaded onto it. You use it like a debit card to pay for eligible expenses, such as over-the-counter medications at the pharmacy.

But it’s important to understand that FSA funds are “use it or lose it.” In other words, you lose any funds left at the end of the plan year, unless your employer offers you one of the following options:

• A grace period of up to 2 and a half more months in the next plan year to spend the leftover money
  A carryover amount of up to $660 per year to spend during the next plan year
• Your employer also doesn’t have to offer either option. So, you could lose any funds left at the end of the plan year or the grace period.

Estimating how much to put into an FSA is hard because you want to contribute as much as possible to maximize the tax benefits. But if you overestimate, you put yourself at risk of losing any remaining money.

What is a health savings account?

A health savings account is an investment account that you fund with pretax dollars to pay for qualified medical expenses. Like with an FSA, you submit a claim to be reimbursed for out-of-pocket expenses or have a debit card you can use to pay for expenses.

But opening an HSA is an option only if you:

• Have an eligible High-Deductible Health Plan (HDHP)
• Aren’t covered by another health plan
• Don’t have an FSA

With an HDHP, you typically pay a lower premium (monthly fee) but have a higher deductible than typical health plans. Essentially, you pay more out of pocket for your eligible medical expenses before your health care plan starts to pay. An HDHP may provide preventive services, such as an annual physical, that are not subject to the deductible or are subject to a lower deductible.

If you have very few medical expenses, even if you pay them out of pocket and don’t reach your deductible, you may still save money with the lower premium. If you go over your deductible, you can benefit from the tax savings of an HSA.

If you have an HDHP that covers just yourself for the full year, you can contribute up to $4,300 to an HSA. If you have family coverage for the full year, you can contribute up to $8,550. If you don’t have coverage for the full year, the amount is reduced. If you’re 55 or older, you can also contribute an additional $1,000.

Want to open a health savings account? It’s a good idea to have a health insurance plan first. Call a licensed insurance agent at (800) 827-9990 to talk about plans, or browse your options online today.

Important differences between an FSA and an HSA

In addition to the differences between FSAs and HSAs discussed above, here are some other important ones to keep in mind:

• Unlike an FSA, HSA funds roll over each plan year. That takes away the stress of having to use them up by the end of the year and even allows you to build a cushion for future medical expenses.
• With an FSA, contributions come in and reimbursements go out. You don’t earn any money. An HSA, on the other hand, is an investment account. Earnings, such as interest, are not taxed as long as you use them to pay for qualified medical expenses.
• While an FSA requires a job-based insurance plan, an HDHP plan can be job-based, from the government’s Health Insurance Marketplace, or through private insurance.
• Employers administer FSAs, and you can also set up an HSA through a financial institution that partners with your health care insurance provider or a bank. Some HSA providers charge fees. Some offer banking features such as debit cards and online banking.
• Unlike an FSA, which ends if you leave your employer, an HSA stays with you if you change employers or leave the workforce.

What are eligible FSA and HSA expenses?

For FSAs and HSAs, eligible medical and dental expenses include out-of-pocket costs for preventing, diagnosing, and treating a physical or mental disability or illness. Examples include:

• Deductibles (the amount of money you pay before insurance kicks in)
• Copayments (a set amount you pay for a medical expense — for example, $25 for a doctor’s visit)
• Coinsurance (a percentage of the cost of a medical expense, such as 20% of an emergency room visit)
• Medical expenses that insurance may not cover, such as acupuncture, prescription glasses and dental implants
• Prescription medications
• Over-the-counter medications, such as pain relievers and acne ointment
• Medical equipment, such as crutches
• Medical supplies, such as bandages and menstrual products
• Diagnostic devices, such as blood sugar and pregnancy test kits
• Transportation costs to and from medical appointments

When it comes to medical expenses related to nutrition, wellness and general health, it can get a bit confusing about what is and isn’t allowed — and whether you need documentation from your medical provider. Check the IRS’s website for more information about this and other eligible medical expenses.

Call a licensed insurance agent at (800) 827-9990 to talk about available health insurance plans, or browse your options online today.