Depending on the type of health insurance plan you have, you may be eligible for the Health Savings Account (HSA) or Flexible Spending Account (FSA) account.
Taking advantage of these accounts will allow you to save your money and to get prepared for the medical expenses during the year. Both these accounts have different qualifications and benefits as well.
This article will tell you everything you need to know to understand the difference between HSA and FSA accounts.
Main Differences between HSA and FSA:
The basic difference between HSA and FSA accounts is that only a single person handles the HSA account and allows contributions to be deposited whereas the FSA account is owned by the employer and thus it is less flexible. This fact reveals that due to some reasons if you leave the job, the funds in the FSA may be lost but if you have an HSA account, funds will be credited to your new HSA account. Both these accounts allow people to save their medical expenses with tax benefits and cover qualified medical expenses utilizing the pretax money. Significant differences are shown in the table below:
|Qualifications||A High Deductible Health Plan. Cannot be enrolled for Medicare. You should not be dependent on someone else’s plan.||No requirements, it is offered by an employer.|
|Annual Contribution Limits||In 2020: For Individual Plan: $3,450 For Family/Household Plan: $6,900||In 2020: For Individual Plan: $2,650 For Family/Household Plan: $5,300|
|Account Ownership||Owned by an employer.||Owned by the individual.|
|What if you Change the Employer or Job?||HSA funds will be yours.||FSA will be lost on changing the employer or job.|
|Rollover Rules||HSA will roll over every year and the unused funds can be saved for the long term.||The employer chooses to offer one of the below-mentioned options:* FSA funds will get expired at the end of the year. You will be given a 2 to 3 months grace period to utilize your funds. You can roll over up to $500 to next year’s FSA period.|
|Changes in Contribution Amount||Can be changed by keeping the Annual Contribution Limits in mind.||Can only be changed: At an open enrollment time. If you are facing a change in your family situation. If you change the employer or the health plan.|
|Penalties on getting your funds Withdrawn||Can be withdrawn without any penalties after the retirement age, 65. If withdrawn before the retirement for non-medical expenses then there will be a 20% penalty.||You may have to submit expenses to be reimbursed by your FSA. Depending on your employer’s choice, you can access the funds for non-medical expenses.|
HSA vs FSA: Qualifications or Requirements:
From the qualifications point of view, HSA has more qualifying restrictions as you need to have HDHP as your only health insurance with a minimum of $1,350 as an individual and $2,700 for a family or household plan. Also, if you are dependent on another person’s account or are eligible for medicare you cannot open an HSA account.
Talking about the FSA account, only an employer can establish this account meaning that the self-employed or unemployed persons are excluded from this account. Business owners that only have a partnership in business worth less than 2% or own a C-corporation can contribute to the FSA account. The good thing about this account is that it is available for any employee without any major requirements, an employee can get the benefit from this account even if he/she doesn’t have a health insurance plan.
FSA vs HSA: Contributions and Flexibility:
FSA can be availed with a relatively low annual contribution, this can be seen clearly with that FSA account allowing a person to contribute up to $2,650 as an individual and $5,300 to a family or household. Comparatively an HSA account requires $800 extra on an individual account while $1,600 on a family or household account which is a lot more than FSA.
An FSA account is the best account for the employees that don’t have to spend a lot on the medical side while the HSA is appropriate for the employees who have higher medical expenses. FSA funds can only be accessed after changing the employer or job if you qualify for continuity through the Consolidated Omnibus Budget Reconciliation Act (COBRA). Meanwhile, the HSA account will follow you wherever you go and your funds will be available to you without any hassle.
Which One is the Ideal Choice, HSA or FSA?
If you are eligible and can easily qualify for the HSA account then its factor of higher limits and contributions rollover makes it the ideal choice. HSA provides you with more flexibility as compared to FSA and allows you to save your medical expenses for a relatively long span. If we look at the FSA account your account balance will not increase over time if your employer doesn’t allow you a $500 rollover. It is also possible that the amount in your FSA account may get forfeited if it is not used within the year.
To choose between the two accounts you should first check the rules and regulations of your company while keeping your health insurance plan in mind. If you are eligible for the HSA go for it as it is the ideal choice and if you are not eligible then you should go for the FSA account.
Can you create both accounts at the same time?
Normally you cannot use both accounts at the same time as they depend on your health insurance plan, employer and cover the same medical expenses as well. You can only use both accounts if you choose the limited version of the FSA account which only bears the dental and vision expenses and is known as the Limited Purpose Flexible Spending Account (LPFSA). If you have higher medical expenses throughout the year then you can combine both these accounts to get the maximum tax advantage.