What’s the Difference Between an FSA or HSA? Here’s What You Should Know

Fall is benefits open enrollment time, which usually ranks just behind raking leaves on the enthusiasm scale. But the right choices can save you a ton of money.

If your employer provides your benefits, you’ve likely heard of (or participate in) a health care flexible spending account (FSA). And the health savings account (HSA) has become more and more popular since it was introduced in 2004.

Both save you money on the same kinds of expenses. But they are very different animals. And since they involve tax savings, the IRS is pretty picky about how you use them.

FSA: Focus on the year ahead

A health care FSA allows you to contribute money each paycheck to pay out-of-pocket health care expenses like deductibles, coinsurance, and copays, as well as other eligible expenses.

Your FSA contributions are pre-tax (also called before-tax) deductions—the money you set aside is not counted as income, so you don’t pay taxes on it.

You use the money in your FSA to pay eligible health care expenses, using an FSA debit card or by submitting receipts for reimbursement.

3 things to know about FSAs:

1. _During open enrollment,_ you choose how much you want to contribute to your FSA for the year, up to the IRS maximum. Even if you have an FSA today and are actively enrolled, you’ll still have to sign up again next year if you want to continue your enrollment

2. _You can’t change your contribution amount_ except when you enroll, or if you have an IRS-qualified change in status, like marriage, having a baby, etc.

* _Use it or lose it._ You need to spend the money in your FSA by the end of the plan year (as defined by your employer). The IRS allows only $500 to be rolled over from one plan year to the next. You will forfeit any balance over $500. (Some plans don’t allow any rollover. Check your plan to be sure.)

The HSA: Like a 401(k) for health care

An HSA is a special tax-advantaged and interest-earning bank account, in your name, that you can use for the same kinds of health care expenses as the health care FSA.

4 things to know about HSAs

1. _You must be enrolled_ in a high-deductible health plan (HDHP) to contribute to an HSA. Most employers provide access to an HSA when you enroll in an HDHP. If not, you can open your own.

2. _You make pre-tax contributions to your HSA_, but the IRS annual limits are higher than for the FSA. Does your employer contribute to your HSA? (Many do!) That’s included in the annual maximum.

3. _Your account earns_ _tax-free_ _Interest, and withdrawals are tax-free_ if you use the money for eligible health care expenses. Some plans allow you to invest part of your balance.

4. _There’s no “use it or lose it” rule._ Unlike the FSA, the HSA lets you choose to use it for current expenses, or let it keep earning interest for future needs—all the way to retirement, if you like.

FSA vs. HSA: How they compare:

	Health care FSA	HSA
Can I use with any medical plan?	Yes\. $You can use with an HDHP only if your employer offers a “Limited Purpose FSA”\.$	No\. Only available with a high deductible health plan $HDHP$\.
Maximum annual contribution amount $2019$	$2,700	Depends on medical coverage: $3,550 individual or $7,100 family $\+ $1,000 if you’re at least age 55 during the year$
Employer contribution?	No\.	Check your plan\.
When are contributions available?	Annual amount available immediately	Funds available after deposit
Federal tax savings	Pre\-tax contributions	3 Ways: Pre\-tax contributions, tax\-free earnings and withdrawals\.\*
Does it earn interest?	No\.	Yes\.
Can I change my contribution amount?	Only during open enrollment or IRS\-qualified status change	Yes\. Start, stop, change anytime\.
Balance carries over to next year?	Up to $500 $if plan allows$; you forfeit remaining balance	Yes\. No spending requirement\.
Can I take it with me?	No\.	Yes\.

\*No taxes on withdrawals for eligible expenses. Some states tax contributions or earnings.

Which is right for you?

You can have a health care FSA with any type of medical plan. So if you like the copays and lower deductibles of a PPO for example, you can still save money on out-of-pocket expenses with an FSA.

The only “downside” to an HSA is that you must enroll in an HDHP to contribute to one. HDHPs have higher deductibles, which can be a factor if you need a lot of care or expensive prescriptions. On the other hand, HDHPs tend to have lower premiums than many other plans.

If prescriptions are a major concern

People sometimes choose a medical plan (and thus, an FSA or HSA) based on the way it covers prescriptions.

But prescription prices are extremely variable, even with insurance. So before you choose a medical plan, be sure to check for the lowest actual price on your medications.

You may find that you can pay less—sometimes much less—by not using your insurance for prescriptions. Either way, now you’re making an informed decision—and that’s always the best choice.

_Note: These are current general guidelines about FSAs and HSAs. Be sure to review your employer’s benefits materials for details about eligibility, dependents, limits, taxes, and other plan specifics._