Q: 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. Although both FSAs and HSAs are structurally similar in that they allow employers to use pre-tax income for eligible medical expenses, there are considerable differences between them. Here’s a quick chart on the difference between an HSA and FSA.

Benefit detailHSAFSA
Enrollment prerequisitesMust have an HSA-qualified high deductible health planEmployer must offer the FSA
Maximum annual contribution (2021)$3,600 for individuals and $7,200 for families, plus an additional $1,000 for those 55 or older$2,750
Who can contributeAnyoneEmployees and employers
What can the money be used for?Anything the IRS considers an eligible medical expense, plus certain types of health insurance premiums.Anything the IRS considers an eligible medical expense.
Who owns the money?The HSA account holderThe 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Is it a “use it or lose it” situation?Nope, the money stays in the account until withdrawn.Yes, unused money usually disappears at the end of the year, unless the employer allows a carryover or grace period.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 accountOn day 1, as soon as the FSA goes into effect
Option to change contributionsThe account holder can change their contribution at any time as long as the amount does not exceed the annual contribution limit. No qualifying life event is required.The employee determines the contribution amount at the beginning of the plan year. The employee cannot change their contribution amount unless there is a qualifying life event.

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. Not all high deductible plans are eligible for HSAs so it’s important to check with the insurer before you buy a HSA-eligible plan. Self-employed individuals who have high deductible plans may also be able to set up HSA accounts.

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. An employee can enroll in the employer sponsored health FSA, regardless of the type of health insurance plan they have even if they are not enrolled in any medical coverage.

Are there maximum contribution limits for HSAs and FSAs?

Yep. The IRS sets maximum contribution limits each year.

HSA

In 2021, an employee with self-only coverage under an HDHP can put $3,600 into an HSA, while an employee with HDHP coverage for their family can put $7,200 in the HSA. Those ages 55 or older can contribute an additional $1,000 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. Family members or any other person may also make contributions on behalf of an eligible individual as well.

FSA

Employees can put up to $2,750 into an FSA in 2021 (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.

Medical care expenses include amounts paid for the diagnosis, cure, mitigation, treatment and/or prevention of a disease. It can also include expenses paid for the purpose of affecting a structure of function of the body. The list of eligible products provided by SIGIS is considered the industry standard and is updated monthly.

It 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. So 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.

On the other hand, employees do not own health FSA accounts, their employers do. Thus, if an employee leaves a company during the year, they would forfeit their remaining health FSA funds to the company. When it comes to unused funds, employers have three options they can choose in determining what an employee can do with unused funds: 

  • Health FSA forfeiture: where an employee forfeits any money that remains in the account and where the employer then gets to keep it
  • Grace Period: After the plan year ends, the employee has a 2.5 month grace period to use the money on expenses. Once the grace period is over, any remaining money goes to the employer. 
  • Rollover (aka carryover): A maximum of $550 (for 2021 plan years) in unused funds can be added to next year’s plan on top of the contribution limit. Employers have the discretion to determine the rollover limit and any leftover funds go to the employer.

If the employer allows a rollover option, they cannot also offer a grace period.

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.

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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.

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