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HSA or FSA? Three Tips To Know The Difference

HSA Or FSA? 3 Tips To Know The Difference

 

HSAs and FSAs are both tax-advantaged medical savings vehicles, so they can easily be confused. However, they have a few key differences; here are three ways to know whether you have an HSA or an FSA.

If you own the account, you have an HSA.

Like 401(k) plans, FSAs are employer-owned accounts, which means your FSA funds are only yours to spend while you’re with your current employer. If you change jobs or retire, you can’t take your funds with you.

However, HSAs are individually owned, which means that when you make a contribution, those dollars belong to you. You never lose the ability to spend the HSA funds in your account, even if you switch employers, lose HSA eligibility, or stop working. HSA accountholders can contribute with confidence, knowing those funds are theirs to keep.

If the money in your account rolls over, you have an HSA.

FSAs are subject to the use-it-or-lose-it rule, which means unused funds are forfeited at the end of the plan year (although some FSAs now allow accountholders to roll over up to $500 or offer a 2½-month grace period for accountholders to spend any unused funds). Also, FSAs are very limited in when accountholders can change their contributions, which means accountholders often must estimate their medical expenses for the upcoming year when setting their contribution levels.

In contrast, any unused funds in your HSA roll over to the following year; there are no limits on when you’re required to spend those dollars. And unlike FSAs, HSA contribution levels can be adjusted as your needs change, and funds can earn interest over time. No more guessing medical costs on the front end or rushing to spend funds before the end of the year; HSAs give you a simple, secure way to save for both current and future healthcare expenses.

If you’re investing money in your account, you have an HSA.

FSAs are tools to help accountholders save taxes on their current medical expenses. Because of their rollover limits and inability to earn interest, they can’t function as long-term investing vehicles.

However, HSAs are not only able to be used to pay for current medical costs tax-free, they are also powerful investing vehicles. You can invest your HSA and let it grow long-term to cover future expenses in retirement, just like a 401(k) or IRA. And, rather than paying for retirement healthcare costs from your 401(k) and having that money taxed, an investment HSA allows you to cover those expenses tax-free. Also, once you’re 65, you can use HSA funds for non-medical expenses with no tax penalty; you just pay regular income taxes like you would with a 401(k).

 

Due to their status as individually-owned accounts and ability to roll over and invest funds, HSAs are vastly superior medical savings vehicles to FSAs. If you’re HSA-eligible, you’re leaving tax savings and retirement security on the table if you don’t have an account. Learn more about HSAs’ unparalleled tax advantages or complete our effortless enrollment if you’d like to start investing in a healthy future today.

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Acing The Transition From A Health FSA To An HSA

Acing The Transition From A Health FSA To An HSA

For people with Health FSAs, HSAs are an attractive option because the funds belong to them, not their employers, and are portable during job changes and retirement. In addition, HSA funds have no use-it-or-lose-it limits and can be invested for long-term growth.

However, moving from a Health FSA to an HSA isn’t always straightforward; if you don’t know the rules, you could end up losing your HSA eligibility. Here are a few FAQs to help you wrap up your Health FSA cleanly and easily transition to an HSA:

If I have a Health FSA, am I HSA-eligible?

No, you aren’t. If you’ve opted in to your employer’s Health FSA plan, you are not eligible to contribute to an HSA, even if you meet all other HSA eligibility requirements. The IRS views general Health FSAs as disqualifying medical coverage and doesn’t allow them to be combined with HSAs.

Am I HSA-eligible if I’m not covered by an FSA, but my spouse is?

No, you are not. Your spouse’s Health FSA coverage disqualifies you from contributing to an HSA, even though you yourself don’t have a Health FSA.

If I spend all of my Health FSA balance before my plan year ends, am I HSA-eligible?

No, you are not. Even if you have a zero balance on your Health FSA, you are not HSA-eligible until your plan year ends.

If I’m in the middle of my Health FSA plan year and am otherwise HSA-eligible, can I opt out of my Health FSA plan mid-year and start making HSA contributions?

No, you cannot. Once you’ve opted in to your Health FSA coverage, you can only change your enrollment status after a qualifying event, such as marriage or divorce. You are not allowed to opt out of your Health FSA coverage before your plan year ends just because you’d rather have an HSA.

If I become otherwise HSA-eligible during my Health FSA plan year, what are my options?

Remember, part of being HSA-eligible is being enrolled in an HSA-qualified health plan. If your health insurance open enrollment falls on a different date than your Health FSA plan year anniversary, you can enroll in the HSA-qualified plan before your FSA plan year ends. You can pay for your medical expenses with your Health FSA funds, but you can’t make HSA contributions until your FSA plan year ends. Also, you cannot change your Health FSA elections during health insurance open enrollment if you opt into a HSA-qualified health plan and expect to face higher pre-deductible medical costs.

In addition, you can also delay enrollment in the HSA-qualified plan for a year, not renew your Health FSA, and enroll in the HSA-qualified plan the following year. In this case, however, you’ll face a period where you won’t have tax-free FSA or HSA funds to pay for your healthcare expenses.

If my Health FSA has a grace period, what does that mean for my HSA eligibility?

Some Health FSAs have a period of time after the plan year ends where accountholders with remaining funds are allowed to spend those funds. This period is typically 2.5 months and is known as a grace period. If your Health FSA has a grace period and you want to make HSA contributions after your FSA plan year ends, you must make sure to spend every penny of your Health FSA funds before your grace period starts.

If you carry even one penny of FSA balance into the grace period, you will not be HSA-eligible until the grace period ends. It doesn’t matter if you spend the remaining funds before the grace period is up; you’ll still have to wait until the grace period is over to make HSA contributions. And since HSA eligibility is determined at the start of each month, if your grace period ends mid-month, you won’t be HSA-eligible until the beginning of the following month.

If my Health FSA has a rollover option, what does that mean for my HSA eligibility?

Many Health FSAs are structured so any unused funds are lost at the end of the plan year, but some are set up to allow rollovers of up to $500. Rolled-over funds are moved to the following plan year and can be kept indefinitely until your FSA is closed.

If your Health FSA has a rollover option and you’d like to make HSA contributions, you can either spend down your funds by the end of your plan year, decline participation in the rollover option, or have your employer move any unused funds into a Limited-Purpose Health FSA (more on that in the next question). If you enter the rollover period with a balance and haven’t declined participation, you won’t be HSA-eligible until the rollover period ends (usually the end of the next plan year). In addition, you aren’t allowed to roll your Health FSA funds into an HSA.

Are there any types of FSAs I can have and still keep HSA eligibility?

Yes, you can still be HSA-eligible if you have any of the below three FSAs:

• Limited-Purpose Health FSA, which only covers dental and vision costs (you must actually have a Limited-Purpose Health FSA; you can’t just only use general Health FSA funds on dental and vision costs)

• Post-Deductible Health FSA, which only reimburses medical expenses after you reach your deductible

• Dependent Care FSA, which covers costs for watching dependents while you and your spouse work or go to school

 

If you’d like to learn more about how HSAs stack up against FSAs, we’ve created a handy, thorough comparison. Get the comparison here.

Or, if you’re HSA-eligible and ready to start making contributions, you can open a HealthSavings HSA today.

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Comparing HSAs to FSAs and HRAs

Like HSAs, Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) are each tax-advantaged medical savings accounts. Here’s how HSAs stack up with them:

 HSAFSAHRA
Are contributions to the account pre-tax or tax-deductible?YesYesYes
Are qualified medical withdrawals tax-deductible?YesYesYes
Can you take the account with you when leaving a job?YesNoNo
Are there limits to the funds you can carry over to the following tax year?NoYes, requires employer approvalYes, may be imposed by employer
Who can contribute to the account?AnyoneTypically, youYour employer
Does money in the account earn interest?YesNoNo
Can funds in the account be invested?YesNoNo
Does the account require being enrolled in a high-deductible health plan (HDHP)?YesNoNo
Can you make non-qualified withdrawals?Yes, with a penaltyNoNo
Can funds be used for Medicare premiums?YesNoNo
Can funds be used for long-term care premiums?YesNoNo
Are rollovers from previous HSAs/FSAs/HRAs/ permitted?YesNoNo
What happens to the account at the accountholder's death?Transfers to designated beneficiary or estateOnly amounts for previously incurred medical expenses may be distributedCan only be used for medical expenses of surviving spouse or tax dependents

Source: Groom Law Group
Ready to open up an HSA? Get started here.

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