What's the difference between an FSA and an HSA?

When it comes to enrolling in a health care plan, we know there are a lot of choices to make. Do I want to stay on my current plan, or do I need to make a switch? Do I choose a high- or low-deductible plan? Do I enroll in a Flexible Savings Account (FSA) or a Health Savings Account (HSA)? We get it. There are a lot of decisions to make and there isn’t a one-size-fits-all solution. You must choose what is best for you, but how do you know what that is? We’re here to help.

One thing that most people have a hard time understanding is the difference between an FSA and an HSA. These two accounts have a lot of similarities, but also a few differences. Here’s what you need to know.

Both an FSA and an HSA are tax-advantaged savings accounts that work to pay for medical expenses that are not covered by insurance. They work by having you contribute pre-taxed funds on a monthly basis. By doing this, you can lower your taxable income and use the funds in your FSA or HSA to cover things like out-of-pocket expenses and prescription costs.

While an FSA and HSA are similar in that they both help cover out-of-pocket expenses, there are differences in who can qualify, when the funds expire and who owns the fund.

At the most basic level, an FSA is a tax-free fund where you can pay for out-of-pocket expenses. However, there are some stipulations. FSAs come as a benefit from your employer and are owned by them, meaning you cannot have an FSA if you are self-employed. If you qualify for an FSA through your employer, you would sign up to take advantage of this account when you choose a health plan. When you do this, you will also choose the contribution amount you’d like to have put into this account for the upcoming year. This is the only time you can change your contribution limit over the year, so it’s important to try to accurately estimate your out-of-pocket expenses.

FSAs are pre-funded, meaning that you can spend the contributed amount you indicated during open enrollment as soon as the beginning of the year. You do not have to wait until those funds build up. The kicker with these accounts is that they work on a use it or lose it system. If you do not use the amount of money you allocated during the year, you forfeit the unused balance. However, some employers may allow you to carry over $500 per calendar year. The account is also tied to your employment with the company. If you leave the company during the middle of the year, you will likely also lose your FSA.

An HSA is also a tax-free fund where you can pay for out-of-pocket medical expenses. But unlike FSAs, they are not tied to your employer. However, they are tied to the kind of health plan you choose. HSAs are only available to people who have a high-deductible health plan. If you choose a plan that allows an HSA, you can then determine how much you’d like to contribute per month. Unlike an FSA, you can change this amount throughout the year.

The amount of money in your HSA rolls over from year to year, so there is no use it or lose it system. These accounts also come with some great additional benefits. One being that these funds can be invested in mutual funds or stocks. Another being that employers frequently will agree to contribute or match a set amount in your HSA as an extra incentive to choose a high-deductible plan.

Both kinds of accounts offer great benefits and can greatly help cover expenses. The plan you choose may come down to what exactly you’re eligible for. If you’re self-employed and want to have a savings account dedicated to medical expenses, you’ll have to go with an HSA. But if you’re employed by a company and have a good idea of what your out-of-pocket expenses will be for the year, an FSA may be the way to go.

Weighing the pros and cons of each is a great starting place, but we’re also here to help! We can explain how each account works over the phone and provide information to help you make a more informed decision. Give us a call by dialing the number on the back of your member ID card or calling 888-206-4697. Our customer service representatives can help point you in the right direction.