Health Insurance

What’s the Difference Between an HSA and an FSA?

HSAs (health savings accounts) and FSAs (flexible spending accounts) are both ways to contribute tax-free dollars toward health care expenses.

But they’re very different in terms of how they work. Here’s a quick chart on the differences between HSAs and FSAs.

HSA (Health Savings Account) FSA (Flexible Spending Account)
Enrollment prerequisites Must have an HSA-qualified high deductible health plan Employer must offer the FSA
Maximum annual contribution (2018) $3,450 for individuals and $6,900 for families, plus an additional $1,000 for those 55 or older $2,650
Who can contribute Anyone Employees and employers
What can the money be used for? Anything the IRS considers a qualified medical expense, plus various types of health insurance premiums Anything the IRS considers a qualified medical expense
Who owns the money? The HSA account holder The employer
Is it a “use it or lose it” situation? Nope, the money stays in the account until withdrawn. Yes, unused money usually disappears at the end of the year, unless the employer allows a carryover or grace period.
When is the money available? Once the money is deposited into the account On day 1, as soon as the FSA goes into effect

Now, let’s dig deeper into the difference between an HSA and an FSA.

Where can an employee get an HSA and an FSA?

Anyone can set up an HSA and put money in it as long as they have an HSA-qualified high deductible health plan, or HDHP.

On the flip side, only an employer can set up an FSA.

You can offer an FSA to your employees alongside other benefits like health insurance, or you can provide an FSA as a standalone benefit. There’s no requirement to offer both.

Are there maximum contribution limits for HSAs and FSAs?

Yep. The IRS sets maximum contribution limits each year.

HSA:

In 2018, an employee with self-only coverage under an HDHP can put $3,450 into an HSA, while an employee with HDHP coverage for their family can put $6,900 in the HSA. Those ages 55 or older can contribute an additional $1000 each year.

This money can come from the employee, the employer, or anyone else, but the total contributions can’t be more than those limits.

FSA:

Employees can put up to $2,650 into an FSA in 2018 (or less, if the employer imposes a lower cap), and employers can match those contributions.

If an employee contributes less than $500 to their FSA, the employer can exceed the regular one-to-one match and contribute up to $500 to their employee’s FSA.

What can the money in HSAs and FSAs be used for?

The money in FSAs and HSAs can generally be used to cover anything that the IRS considers a qualified medical expense.

That includes things like the following:

  • Coinsurance
  • Copays
  • Deductibles
  • Dental costs
  • Fertility treatments
  • Long-term care costs
  • Pregnancy tests
  • Vasectomies
  • Transportation and lodging if travel is required to receive medical care

Other than insulin, FSA and HSA money can’t be used to pay for over-the-counter medications unless a doctor provides a prescription. But the money can be used to pay for non-drug medical supplies available at pharmacies—things like bandages and sunscreen.

HSA money can also be used to pay long-term care insurance premiums, Medicare premiums, COBRA premiums, or health insurance premiums while the person is receiving unemployment benefits.

In addition, HSA money can be invested in the stock market, in bonds, or in an interest-bearing account. And the gains from those investments aren’t taxed by the IRS—as long as the money is withdrawn for medical expenses. (Note: some states do tax HSA contributions and gains, so make sure to double check with your accountant.)

Who owns the money?

HSA money rolls over from one year to the next and belongs to the person with the HSA.

Even if you put money in your employee’s HSA account, that money belongs to the employee once it’s in the HSA. So if the employee quits or is terminated, the money goes with them.

In contrast, the money in an FSA belongs to the employer.

Your employees can use the tax-free dollars in an FSA to pay for qualified medical expenses, but if they don’t spend it by the end of the year, the money gets forfeited—unless you allow for a grace period or a carryover (but not both).

  • If a grace period is allowed, employees have 2.5 months after the end of the plan year to use up the money that was left in the FSA.
  • If a carryover allowance is used, participants can keep up to $500 (or less, if the employer sets a lower limit) of leftover funds and use that money to cover medical expenses in the coming year.

Similarly, employees forfeit their FSA money if they quit or are terminated when there’s still unused money in their FSA.

Quick note: A grace period is different from a run-out period. The latter is when you give your employees time past the end of the plan year to submit receipts for reimbursement. Those receipts, however, must be for expenses incurred during the plan year.

So an FSA might be a good option for someone who is planning to have medical expenses in the current year, whereas an HSA might be a good option for anyone who wants to be able to save for medical expenses that could crop up at any time—this year, next year, or decades down the road.

Some people even use their HSAs as backup retirement accounts or emergency funds, which can’t be done with an FSA.

When can HSA and FSA money be used?

For both HSA and FSA accounts, annual contribution amounts have to be chosen before the plan year starts. That amount is then divided equally across the plan year and deposited incrementally.

It’s possible to update HSA contribution amount later on, but FSA contribution totals cannot be modified.

With an HSA, your employee can take money out as soon as they have a qualified medical expense, or at any time after that. They can pay the bill using their own money, save the receipt, and wait as long as they want to reimburse themselves from the HSA.

But your employee can only withdraw money that’s been deposited into the HSA.

Let’s say your employee Rafael chooses to put $200 in his HSA each month. He needs surgery in early April, and his deductible is $2,400.

At that moment, Rafael will only have put $600 into his HSA, so he can only put that much towards his deductible. However, if he keeps contributing to his HSA, he can withdraw more money later to pay himself back for the rest of the deductible.

On the other hand, each employee’s total FSA contribution amount is available to them from the get-go.

So let’s say Rafael has an FSA instead. He’s chosen to contribute $200/month, or $2,400 for the year.

He needs the same surgery in early April. Even though he’s only contributed $600 to his FSA at that point, he could still withdraw the full $2,400 to cover his deductible.

And if he quits his job in late April, he wouldn’t have to pay any of that money back. In such a situation, the employer takes it on the chin.

This article provides general information and shouldn’t be construed as legal, benefits, or HR advice. Benefits and insurance regulations may change over time and may vary by location and employer size. So, please consult a licensed broker or appropriately certified expert for advice specific to your business’s benefits options.