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HSA vs. FSA – An Overview

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are both tax-advantaged financial accounts designed for funding healthcare expenses. They allow you to use pre-tax dollars to pay for medical expenses you know you’ll have. Choosing between an HSA vs. FSA can be challenging – they seem similar on the surface, but one may actually be more suitable for your situation than the other.

This article will break down the key difference between HSAs vs. FSAs.

Fast Facts: Health Savings Accounts – 2019 Annual Limits

  • Min. Deductible Amount: $1,350 (single), $2,700 (family)
  • Max. Out-of-Pocket Amount: $6,750 (single), $13,500 (family)
  • HSA Statutory Contribution Max: $3,500 (single), $7,000 (family), $1,000 (catch-up for age 55+)

These numbers are for tax year 2019 and are subject to change. The information here is from a third party. It is deemed reliable, but we cannot guarantee its accuracy. Data is subject to change and should be verified with a tax advisor.

Source: Society for Human Resource Management

What Are Tax-Advantaged Health Savings Accounts?

Using accounts like an HSA or an FSA allow you to avoid paying taxes on a predetermined portion of your salary that you spend on medical expenses. In an employer-sponsored health plan, your employer typically covers the majority of the premium costs. The employee is then responsible for paying the remaining coverage. With HSAs and FSAs, an employee puts aside pre-tax money from their income for health care costs called “qualified expenses” (qualified expenses are usually deductibles, copayments, prescription costs, etc). Another benefit of these accounts is that HSAs and FSAs reduce your FICA taxes, which are the taxes employers deduct from your paycheck for Social Security and Medicare. FICA taxes can eat up to 7.65% of your check every pay period.

While these accounts both have tax benefits, they are different in a few key ways.

What is an FSA?

FSAs let you set aside before-tax dollars to cover “qualified expenses.” The two most popular types of FSAs cover healthcare (out-of-pocket expenses such as co-pay, deductible or certain over-the-counter medications are considered qualified) and transit (usually garage or public transportation bills are qualified).

Each FSA is subject to contribution limits; for healthcare FSAs, the limit is $2,700 per year for 2019 (was $2,650 in 2018). Your contributions are not tax-deductible because the accounts are funded through salary deferrals but contributing to an FSA does reduce your taxable wages. Although you lose any money that you don’t use for each contribution year, some employer plans offer you the option to roll over up to $500 to the next year, which can add up when paying for medical expenses in pre-tax dollars.

So, how do FSAs actually work? Usually, funds you set aside for an FSA are front loaded onto a debit card, and you pay into out of your paychecks for that year.

What is an HSA?

If you’re in a high deductible health plan and you’re not enrolled in Medicare, you can qualify to set up an HSA. You contribute to your HSA with pre-tax dollars that you may draw from tax free to pay for qualified medical expenses. While you cannot contribute to an HSA if you’re covered by Medicare, you are eligible to use your HSA to pay for Medicare Premiums

HSAs offer two main perks: first, the funds may be invested (and grow tax free), and second, they remain in your account from year to year until you use them. There isn’t any “use-it-or-lose-it” rule; any remaining balance can be carried over to the following year. In addition, you (not your employer) own your HSA, which means if you change jobs or relocate to another state, you can take your HSA and its balance with you. It is a long-term asset.

You can think of HSAs as like retirement accounts – you not only set aside savings but also invest the money. The only difference is that you can access those funds whenever you want without taxes or penalties – but only for qualified health-care expenses. From a tax savings perspective, that means they’re even more attractive than 401ks. After age 65, distributions taken out of an HSA account for non-medical expenses are not subject to a penalty, but will be subject to ordinary income tax.

Unlike with FSAs, funds for HSAs are not front loaded, and you only have access to funds you’ve previously contributed into the account.

Tip: You generally have until the tax filing deadline (the filing deadline for the 2018 tax year is April 15th, 2019) to fund your HSA. If you didn’t max it out last year, you can still make a lump sum contribution for the prior year to benefit your tax bill when April 15th rolls around.

Personal Capital Tax Strategy: Funding HSAs

The biggest mistake employees make with their HSA is not funding it enough. If you’re in a high deductible health plan, it makes sense to open an account since your money is carried forward and accumulates. Your contributions can be invested and withdrawn when you need them for medical expenses. Speak with your employer to find out when open enrollment takes place to open an account. (If you participate in both an FSA and an HSA, make sure you find out how that limits your benefits.)

Read More: Tax Planning

Our Take: HSA vs. FSA – What’s Right For You?

It’s important to note that if you qualify for an HSA, you cannot have both an HSA and an FSA. Speak to someone in HR at your company to clarify if this is the case for you.

Both accounts have benefits that can make out-of-pocket medical expenses much more manageable. If you qualify for an HSA, this might be an option to consider as the limits are higher and you can rollover your contributions from year to year. However, the plans are different, so talk to your financial advisor for more clarity on which one is best for your specific situation.

Personal Capital’s financial advisors offer holistic wealth management advice, including tax planning and optimization. Get a free, no-obligation consultation with an advisor here.

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