What is the difference between a flexible spending account and a health savings account
| Aspect | Flexible Spending Account (FSA) | Health Savings Account (HSA) |
|---|---|---|
| Tax Advantages | Contributions are made with pre-tax dollars, reducing taxable income for the year in which contributions are made. Withdrawals for qualified medical expenses are also tax-free. | Contributions are made with pre-tax dollars or are tax-deductible (if made outside of payroll deductions), reducing taxable income for the year. Withdrawals for qualified medical expenses are tax-free. |
| Eligibility | Available to employees through their employer's benefits plan. Employers may offer limited carryover or grace period options. | Available to individuals and families with High Deductible Health Plans (HDHPs). No requirement for employer sponsorship. |
| Contribution Limits | Contribution limits are set by the IRS and may vary each year. For 2023, the annual contribution limit is $2,850 for individual FSAs. | Contribution limits are set by the IRS and may vary each year. For 2023, the annual contribution limit is $3,700 for self-only coverage and $7,450 for family coverage. |
| Ownership | Typically owned by the employer, and employees may not take the account with them if they change jobs. | Owned by the individual, allowing them to retain the account even if they change jobs or health plans. |
| Account Portability | Generally not portable, and funds cannot be transferred to a different employer or health plan if the employee changes jobs. | Highly portable, and individuals can keep the HSA and funds even if they change employers or health plans. |
| Account Access | Access to funds is typically available from the start of the plan year, even if the full annual contribution amount has not yet been deposited. | Access to funds is based on actual contributions made to the account. Individuals can only withdraw funds that are available in the account. |
| Rollover of Funds | Limited rollover options may be available, such as a carryover of up to $570 (2023) or a grace period for spending unused funds. | Funds roll over from year to year, with no use-it-or-lose-it rule. Funds in an HSA can accumulate and grow over time. |
| Investment Options | Investment options are generally limited, and account holders may have few choices for growing their funds. | HSA funds can be invested in a variety of options, including stocks, bonds, mutual funds, and other investment vehicles. |
| Medicare Eligibility | FSAs cannot be used to cover Medicare premiums, but they can be used for other qualified medical expenses. | HSAs can be used to cover Medicare premiums (except for Medigap), making them useful for healthcare costs during retirement. |
| Penalties for Non-Qualified Expenses | Withdrawals for non-qualified medical expenses are subject to income tax and an additional penalty, typically 20% for FSAs. | Withdrawals for non-qualified medical expenses are subject to income tax and an additional penalty of 20%, but the penalty is waived after age 65. |
| Use for Non-Medical Expenses | FSAs are primarily for qualified medical expenses and may have limited options for using funds for non-medical purposes. | HSAs can be used for non-medical expenses after age 65 without a penalty, though income tax still applies. |
| Account Ownership After Death | FSAs typically do not continue after the account holder's death, and the remaining balance may not be inherited by beneficiaries. | HSAs can be inherited by a surviving spouse, who can continue to use the HSA as their own. Non-spouse beneficiaries may face taxation upon inheritance. |