FSA vs HSA
Health Savings Account (HSA) and Flexible Savings Account (FSA) are two instruments for savings that are available to the citizens in the US. Both of these accounts help the Americans to put aside money for future use in medical emergencies. Both have their distinct features and also have rules for the usage of the money. Both the accounts are tax advantage accounts with tax deferral benefits to the account holder. Money that goes into these accounts is not pre taxed which results in substantial savings for the account holder.
FSA is flexible savings account which is a type of health saving account or health insurance plan with tax free benefits to the account holder. The money deposited in FSA can be used for medical expenses that are not covered by any other insurance. A person can participate in several types of FSA but the funds from one FSA cannot be transferred into another. The coverage of any FSA is limited to that year only and the funds do not roll over into next year. Debit cards have been introduced to facilitate spending through FSA.
Beginning 2011, as per new health care reforms under Affordable Care Act, money from FSA cannot be used to purchase over the counter drugs if you do not have a doctor’s prescription, except for insulin.
If one contributes $500 in a year to his FSA and has to pay $500 as medical expenses, he can do so with his FSA. But if he did not have FSA, he would have to earn $650 to be able to spend $500 on his medical expenses, as the additional $150 would have gone as income tax.
Health savings account is an opportunity for the Americans to save for medical expenses in future. The funds that they contribute to HSA are tax free at the time of deposit, which is an attractive feature of this account. The funds do not expire with year end, and if not spent, keep rolling year after year. HSA can be opened by any individual who is a tax payer. The maximum contribution that an individual can make to his HSA is $3050 in 2011. The contribution limit for a family is $6150. In many respects, HSA is similar to an IRA. Withdrawals from HSA are not subject to taxation.
Beginning 2011, as per new health care reforms under Affordable Care Act, only prescribed medicines or drugs (including over-the-counter medicines and drugs that are prescribed), except for insulin will be considered qualifying medical expenses and subject to preferred tax treatment for HSA.
Difference between FSA and HSA
Both FSA and HSA are meant for use for medical expenses, but there are differences in benefits linked, withdrawal methods and expiry terms. The first and foremost difference between the two is that FSA is a SPENDING account while HSA is a SAVING account. Whatever you contribute to FSA needs to be spent in that year only while the funds that go into HAS can be used anytime even after the year has ended. One can have FSA even if he has HSA or not. You can use FSA funds for both medical as well as child care expenses, while HSA funds are meant only for medical expenses. The funds that you put into HAS can be invested into stocks, bonds and securities if you do not use it just like an IRA while the FSA amount has to be utilized in that year only so there is no question of investing it. Once you are 65, and have funds in your HSA, you can cash it and invest in your IRA.
What’s the difference?
FSA is a SPENDING account while HSA is a SAVING account.
FSA has one year time limit for spending while funds in HSA can be carried over to following year.
Funds in FSA can be used for medical and child care expenses while HSA meant for medical expenses only.
Funds in HSA can be invested in stocks, bonds and securities.
When you reach 65, you can cash the remaining funds in HSA or role it over to IRA.