Understanding The Differences Between HSAs And FSAs

by Tom Torre | Originally posted on Forbes

Health savings accounts and flexible spending accounts are both great tools that can help you save money in taxes and better control your health care costs. But while at a glance they can appear to be very similar, they’re far from the same.

We’ve found that many health care consumers are still confused about what differentiates HSAs from FSAs. And that confusion can have real consequences and result in missed opportunities to save money and achieve better financial wellness in both the short and long term.

Despite the HSA market’s continued strong growth, the knowledge gap surrounding HSAs is still a major issue in the U.S. Here are eight key differences between the two account types.

1. Eligibility

Anyone enrolled in an HSA-qualified high-deductible health plan is eligible to open an HSA — including small business owners and those who are self-employed. A health care FSA can only be opened by an employee whose employer includes an FSA as part of their benefits offering. And while in general you can’t have both an HSA and health care FSA at the same time, there is one exception: If you have an HSA, you can also have a limited purpose FSA that complements your HSA and only covers certain dental, vision and post-deductible medical expenses.

It’s also important to note that having an HSA doesn’t impact the ability to have a dependent care FSA, which is separate from a health care FSA and provides an excellent tax-advantaged way to pay for child and dependent care. You can have both an HSA and dependent care FSA simultaneously with no issues.

2. Savings Vs. Spending

As HSA is focused on savings spanning beyond the 12-month cycle, while an FSA is designed to be spent down every year. To promote long-term savings, HSAs can be rolled over year after year indefinitely with no penalties or limitations. For FSA funds that you don’t spend within the plan year, you may have either a two-and-a-half-month grace period to spend them or an option to roll over up to $550 of unused funds into the next plan year, based on employer discretion. Otherwise, you forfeit any remaining FSA funds. However, it’s important to note that for 2021, the IRS is giving employers the option to allow employees to roll over any unused FSA balances from 2021 into the plan year ending in 2022.

3. Contribution Limits 

For 2021, individuals can contribute up to $3,600 to their HSA. Those with family coverage can contribute up to $7,200. An extra $1,000 catch-up contribution is available to anyone 55 or older, regardless of coverage type. For FSAs, you can contribute $2,750, with no differentiation between individual or family coverage and no catch-up contribution available.

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