October 2021

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 How to Save Money With FSAs or HSAs (and Which One to Choose)A Flexible Spending Account (FSA) and a Health Savings Account (HSA) have very similar names, so it’s easy to get the two confused. While they have some similarities, they also have important differences.

Since you can choose only one or the other each year, it’s important to understand which one might work best for your situation before you make your choice. Here’s how FSAs and HSAs compare:

How an FSA and HSA are similar
FSAs and HSAs allow you to use pre-tax money on healthcare costs. You select a certain amount to contribute every paycheck, and that money goes directly into your FSA or HSA on a pretax basis. You can then spend those untaxed dollars on eligible medical expenses. Additionally, since you contribute to the account before taxes are withheld, it lowers your taxable income, which can help you save even more money on taxes.

Both FSAs and HSAs allow you to use the money in your account on co-pays and other eligible healthcare expenses, such as lab work and prescriptions, but not on your monthly insurance premiums.

Comparing FSA and HSA plans at a glance
Flexible Spending Account (FSA)Health Savings Account (HSA)EligibilityYou can only get it through an employer.You must have a high-deductible health plan (HDHP), can’t be eligible for Medicare, and can’t be claimed as a dependent. You don’t need to get it through an employer.Annual contribution limits• $2,750 for individuals
• $5,500 for families¹• $3,650 for individuals
• $7,300 for families²Contribution frequencyYou must deposit the same amount every paycheck.You can make regular or lump-sum payments (up to the annual limit).Changing contribution amountsYou must change your contribution amount during open enrollment, unless you change employers or your financial situation changes.You may change your contribution amount at any time.Are contributions taxed?NoNoDo funds roll over?Maybe. Up to $550 may be rolled over each year, but only at the employer’s discretion. Otherwise, it’s “use it or lose it.”Yes. Entire balance may be carried over to the next year.OwnershipEmployer. You usually lose any unspent money when you leave that employer.Individual. The HSA goes with you when you change jobs or become unemployed.Withdrawal penaltiesYou may not have access to funds for non-medical expenses, depending on your employer’s plan.• Under age 65: 20% penalty tax for non-medical uses
• 65 and older: All withdrawals taxed as regular incomeInvestment optionsMaintained as cash by the employer.May be invested in a mutual fund or exchange-traded fund (and any capital gains will be tax-free).

How an FSA and HSA are different

Ownership
FSA money is technically owned by your employer, not you. This means that you must have an employer who offers an FSA plan, and if you leave your job you could lose the money you’ve put into your account that you haven’t used yet.

HSA money is owned by you, which means it stays with you throughout your lifetime. When you change employers, you can resume making HSA contributions in connection with your new employer’s high-deductible health plan (HDHP), or use the funds without contributing anything to them.

Contributions & Changes
FSAs require you to select a fixed amount to contribute from every paycheck (usually during fall open enrollment) for the following year. Once you’ve made your selection, you can’t change it until next year’s open enrollment—unless you have a qualifying event (e.g., marriage, divorce, new dependent, new job, etc.).

Tip: Open enrollment for the health insurance marketplace, state exchanges, and individual plans is Nov. 1 through Dec. 15 for coverage beginning Jan. 1. Your company may have its own open enrollment period, but it typically begins by November.

An HSA is much more flexible. You can start and stop contributions at any time, and you can change the amount of your contributions at any time. You can also put in lump-sum amounts, such as when you get a bonus check.

Rollover
FSA money is “use it or lose it.” At the end of the year, any funds that you haven’t spent on eligible expenses is forfeited—unless your employer allows you to roll over up to a maximum of $550 a year. So you’ll need to be careful to contribute only what you know you can use or roll over, and then make sure you spend it by the end of year.

The entire HSA balance, on the other hand, rolls over every year. Once you put money into an HSA, it’s yours until you spend it.

Spending
FSA money can be used for only healthcare expenses and must be approved as an eligible expense by your employer’s plan before being paid or reimbursed.

If you need your HSA for non-medical expenses, you can withdraw it for other purposes—but such withdrawals are taxable and, if you’re under 65, subject to another 20% penalty tax because of the non-medical purpose. At age 65, non-medical withdrawals are taxed like income but the 20% penalty tax is waived.

Saving and Investing
While an FSA can be used for only medical expenses in the current year, HSA money can be invested into a mutual fund or EFT, and any capital gains are tax-free. This is a great way to save for your future medical expenses and have that savings work for you as an investment until you need it.

Qualification
You can contribute to an HSA only if you also choose a high-deductible health insurance plan (HDHP). HDHPs usually charge lower monthly premiums, but are offset by a higher deductible that you must meet before your insurance coverage kicks in. For tax year 2022, HSA-eligible HDHPs must have: 

• A minimum annual deductible of $1,400 for individuals, $2,800 for families
• Annual deductible and other out-of-pocket expenses totaling a maximum of $7,050 for individuals, $14,100 for families²

HSAs also have other restrictions: 

• You can’t be covered by another plan (although there are some exceptions, including workers compensation, prescription plans, vision, dental, or coverage for a specific illness).
• You cannot be enrolled in Medicare while contributing to an HSA.
• You can’t be claimed as a dependent on someone else’s prior year tax return. 

FSAs are much easier to qualify for and are available with most insurance plans offered through employers. Unfortunately, they’re not available on the health insurance marketplace to people who are self-employed or out of work.

FSA vs HSA: Pros and Cons

So which type of healthcare savings account is best for you or your family? If you’re still not sure, we’ve broken down the pros and cons to help you decide.
FSAHSAPros:
• Allows you to spend pre-tax money on medical expenses
• Available with low-deductible health plansPros:
• Allows you to spend pre-tax money on medical expenses
• Full balance rolls over every year
• No limit on the account balance (though there are annual contribution limits)
• Can change contribution amounts at any time of the year
• Can invest and grow your money tax-free
• You own the account and can take it with you wherever you go
• Can have an HSA even if you’re self-employed or unemployedCons:
• Money is “use it or lose it”
• Can only change contribution amounts during open enrollment or with a qualifying event
• Available only through an employer
• Funds are forfeited if you leave your job
• Can’t invest the money or use it for non-medical expensesCons:
• Only available with certain high-deductible insurance plans
• Tax consequences for non-medical withdrawals
Bottom line: Because an HSA is owned by you, rolls over in full, has higher contribution limits than an FSA, and can be invested in assets, you can use it to save up for medical costs far into the future. So even if you’re young and healthy with low medical costs, saving money in an HSA will ensure that you have money available for higher medical expenses in later years.

However, the fact that HSAs are bound to high-deductible health plans makes it a deal-breaker for some people, especially those who are living on a tight budget and need a low-deductible plan to cover medical costs. In that case, an FSA can still be a nice way to pay for your medical expenses while saving a bit on taxes.

With open enrollment around the corner, check with your employer’s benefits department to see if they offer FSAs and HSAs. If you can’t get a plan through an employer, see what plans are offered on the national health insurance marketplace and state healthcare marketplaces.

Sources and notes:

1. These are the 2021 limits. The 2022 FSA contribution limits have not been announced as of this writing.
2. 2022 HSA contribution limit, IRS.gov, “26 CFR 601.602: Tax forms and instructions“

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