What Are HSA and FSA Accounts?
Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) are two important options to save on your healthcare dollar. They both use pre-tax money to pay for covered health care services and qualified medical expenses.
First a disclosure – I am a physician not an accountant. Before making any financial decisions be sure to check with your financial or insurance professional.
HSAs came to be in 2003 under the Medicare Prescription Drug Improvement & Modernization Act. The legal authority for FSAs come from the Internal Revenue Code Section 125. Both the HSAs and FSAs are tax advantaged plans are sanctioned by the IRS. However, they are very different.
What Are the Differences Between HSA and FSA Accounts?
There are five fundamental differences between HSAs and FSAs including how they are designed to be used, contribution limits, interest earning potential, rollover of funds and ownership. In addition, there are several other differences worth making note of which are addressed in the chart later in this article.
Who Can Use a HSA vs FSA?
HSAs are designed to be used with a qualified high deductible health insurance plans (HDHP), either provided by your employer or purchased as an individual. For 2017, that means a minimum deductible of $1,300 for an individual and $2,600 for a couple. FSAs by contrast are not tied to a health insurance requirement. Unlike HSAs, FSAs are only available through an employer.
High deductible health insurance is a good idea, as discussed in 8 Simple Ways to Save Money on Healthcare. Most HDHP have much lower premiums than low deductible insurance plans. Health insurance should be used to protect against financial ruin in the case of an unforeseen medical crisis. Health insurance should not be used as pre-paid healthcare. Think of health insurance much like you do auto insurance. We do not expect our auto insurance to pay for oil changes, new wiper blades or tires. Similarly, we should not expect our health insurance to pay for a sore throat, a minor cut, or an ingrown toenail. HDHP incentivizes us to shop around for the best price for healthcare services and to take good care of ourselves to reduce medical expenses. HSAs and FSAs allow us to put money aside (tax free) to pay for these out-of-pocket expenses.
Where Can You Open an FSA or HSA Account?
FSAs are only offered through your employer. HSAs can be offered through your employer, but you can also open a HSA independently. Most banks and financial institutions offer HSA accounts, so if you have a good relationship with your bank or other financial institution that would be a good place to start. There are also specialty banks that only do HSA accounts such as HSA Bank.
What Are the Contribution Limits for a HSA vs. FSA?
HSAs have a much higher contribution limit than FSAs. HSA and FSA maximum contributions change annually, so be sure you check the IRS web site at www.irs.gov. For 2017, the maximum HSA contribution is $3,400.00 for an individual and $6,750.00 for a family. FSA contribution amounts are determined by your employer up to a maximum of $2,600.00 annually by the IRS.
How Do You Use the Funds in an HSA or FSA Account?
After paying for a qualified medical expense, you request reimbursement from the institution (employer or bank) that is holding your funds by submitting your receipts. Each bank/employer has their own process for releasing the funds, though it is usually a simple process. Save your receipts in case your HSA or FSA is ever audited (a rare occurrence) so you have documentation. As I have mentioned previously, after age 65 your un-reimbursed medical receipts can be used to withdraw funds tax free from your HSA. This, in effect, provides tax free income.
Do HSA or FSA Accounts Earn Interest?
Unlike an FSA, your HSA contribution can earn interest which is also tax free. Think of HSAs like a personal tax-free bank account to help you save and pay for covered health care services and qualified medical expenses including the deductible on your HDHP. FSA contributions, while also tax free do not earn interest.
Do FSA or HSA Contributions Rollover Yearly?
In a HSA, the unused amount rolls over year to year. That is, if you do not use the entire amount of your HSA it stays in your account for the next year and continues to earn tax free interest. This is very different than an FSA which is limited to a maximum $500 roll over and only at your employer’s discretion. Any amount above $500.00 goes back to the employer. FSAs are often referred to as a use it or lose it account.
Furthermore, HSAs can be used in effect as a healthcare retirement account. That is, money saved today can be used tax free when we retire when healthcare expenses tend to be higher. And, after age 65 your HSA dollars can be used for non-medical expenses if you pay taxes on the dollars that are withdrawn. After age 65, your HSA looks a lot like a 401K or IRA. If you stockpile your medical receipts that you pay out of pocket while you have an HAS, you can file for reimbursement for these expenses in retirement. Doing this will allow you to supplement your retirement income, tax-free, in years in which tapping other accounts would push you into a higher tax bracket or expose you to higher Medicare premiums.
How Does Job Loss Affect FSA and HSA Accounts?
You own your HSA. That is, an HSA is your property to take with you when you leave your job – just like a bank account. FSAs are the property of your employer. If you leave your job you lose your FSA account.
HSA and FSA dollars can be spent on hundreds of covered health care services and qualified medical expenses including but not limited to: out-of-pocket deductibles, acupuncture, COBRA premiums, birth control pills, vaccinations, vision care, dental care, prescription drugs, physical therapy, etc. This is determined by IRS code 213 (d). Note also that long term care insurance can, in some cases, be paid for by pre-tax dollars.
As of October 2017, President Trump has sent a directive to HHS and the IRS to look into increasing the HSA maximum and allowing HSA contributions to be used to pay for health insurance premiums (currently not allowed.) If this occurs, it will in effect equalize the tax treatment between businesses and individuals for the purchase of health insurance. Currently only businesses are allowed to deduct the cost of health insurance purchased on behalf of their employees.
As you can see, with a little effort and planning you can use the IRS rules for HSA and FSA accounts to save significantly on healthcare expenses. The future looks bright for HSAs so keep looking for updates as the rules change.
HSA vs. FSA Comparison Chart
|What is it?||It is like a personal bank account to help you save and pay for covered healthcare expenses.||It is an account set up by your employer to help you pay for covered healthcare expenses.|
|How do I get it?||You must first sign up for a high-deductible health plan (HDHP) that meets the IRS requirements.||You can sign up for a FSA if it is offered by your employer. You do not need to sign up for a health plan.|
|Who puts money in it?||You, your family, your employer and others can put money into it if they choses.||You or your employer if they choose.|
|Is there a limit on how much I can put in it?||Limits are set by the IRS. For 2017, it is $3,400 for an individual and $6,650 for a family.||Your employer sets the annual limit up to the IRS maximum of $2,600|
|If I do not spend all the money can I use it next year?||Yes. The money rolls over year to year… just like a bank account.||Limited to up to maximum of $500/year at your employer’s discretion.|
|Can I cash it out at any time?||Yes, but with a 20% penalty prior to age 65. After age 65 no penalty but the withdrawal is taxed if not used for healthcare.||No cash out allowed.|
|Can I keep it if I leave my job?||Yes, it is like your own personal bank account.||No, your employer keeps the money.|
|What can I spend it on?||Any qualified health expense as set by the IRS. IRC 213 (d)||Any qualified health expense as set by the IRS. IRC 213 (d)|
|Does the money in my account earn interest?||Yes, the money not spent earns interest tax free.||No.|
|Do I have to pay taxes on the money deposited into the account||No. You do not have to pay federal tax, social security tax or, in most instances, state income taxes.||No. You do not have to pay federal tax, social security tax or, in most instances state income taxes.|