HSAs and FSAs have different qualifications and advantages, however. Here’s everything you need to better understand HSAs and FSAs before signing up.
What’s the Difference Between an HSA and an FSA?
You can only open a flexible spending account through your employer or other group offering it, but there are no additional qualifications or restrictions as there are with an HSA.
Qualified Health Expenses
HSAs and FSAs are meant to cover qualified health expenses. Health insurance premiums typically aren’t considered a qualified medical expense by HSAs unless you’re paying for certain types of coverage like COBRA or receiving unemployment. You can pay for prescription medications, including insulin, with both types of accounts. Over-the-counter medicine and menstrual care products are also qualified expenses. You can typically use the accounts to cover copayments and deductibles for doctor visits and hospital stays. Essential dental care is considered a qualified health expense, but teeth whitening isn’t. Eyeglasses are also a qualified expense. In general, if it’s something you could deduct as a medical expense on your taxes, you can use HSA or FSA funds to pay for it.
Restrictions
Because both types of plans offer a tax-free way to save for medical expenses, both come with restrictions. However, generally, FSAs are the more restrictive of the two plan types. For instance, you can’t transfer your FSA to a new employer when you change jobs and you can only change your contribution during open enrollment or when you have a qualifying life event such as getting married or having a child. These limits don’t apply to HSAs. The biggest difference between the two accounts, though, are contribution limits and how long your money can stay in the account. You can put more into an HSA each year and roll over your leftover balance at the end of the year. For tax year 2022, the annual contribution limit for an HSA is $3,650 for individuals and $7,300 for families. For an FSA, the tax year 2022 annual contribution limit is $2,850. With an FSA, your contributions are limited to $2,800. Employers may allow you to carry over up to $570 (in tax year 2022) to the next plan year or allow you a two-and-a-half month grace period to spend the previous year’s funds.
Tax Incentives and Savings Potential
Both HSAs and FSAs offer the same tax advantages upfront—you can put money into the accounts and withdraw it to pay medical expenses tax-free. However, HSAs offer far greater tax advantages and savings potential. Because you can roll over your balance each year, your HSA becomes another savings vehicle within your broader financial portfolio. This money also grows tax-deferred, meaning you won’t pay any taxes on the growth until you withdraw the money. However, if you wait to withdraw that money after age 65, during retirement, you can withdraw it tax-free. Because of these features, many people use an HSA as a secondary retirement savings account.
Which Is Right for You?
Overall, HSAs are more flexible. You pre-tax contributions lower your tax bill, and you can use an HSA to save money. Also, you can roll over unused money. You do have to have an HDHP, though, and not everyone is comfortable with a high-deductible insurance plan. An FSA doesn’t build up over time, and you can lose leftover funds at the end of the year. You also stand to lose your FSA if you change employers. An FSA offers tax savings and budgeting for medical expenses, so if you don’t qualify for an HSA, an FSA may be an alternative.
Impact of the CARES Act on FSAs and HSAs
One crucial change applied to telehealth appointments. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, patients with high-deductible health plans paired with HSAs can have telehealth appointments before they meet their deductible. The second provision allows over-the-counter medical products as eligible expenses for HSAs and FSAs without a prescription, something not available before the new law. On December 27, 2020, the Consolidated Appropriations Act 2021 was signed into law, which impacted some CARES Act provisions. Under this, taxpayers with FSAs and dependent care flexible spending accounts could roll over funds from 2020 to 2021 and from 2021 to tax year 2022.
