Q. What is the difference between a Medical FSA and an HSA?
A. Both FSAs and HSAs are tax-advantaged accounts that allow people to save money to pay for qualified medical expenses, but they have several key differences.
Flexible Spending Accounts (FSAs)
- Established by an employer.
- Usually funded by pre-tax payroll deduction, but employers can also contribute.
- Can be used in conjunction with any type of health insurance, although health insurance coverage is not required.
- FSA funds can be used to cover deductibles, copays and coinsurance, as well as qualified medical expenses that are not covered by health insurance, such as LASIK eye surgery. Prior to 2011, FSA funds could be used to purchase over-the-counter medications, but now they can only be used for OTC medications if a doctor has prescribed them.
- “Use it or lose it” – money not used by the end of the year (or by March 15th of the following year if the employer offers a grace period) is forfeited, although employers can allow enrollees to carry over up to $500 to the next year instead of allowing FSA funds to be used as late as March 15 of the following year.
- In the past, employers could set their own FSA contribution limits for their employees. But the ACA limits contributions to no more than $2,550 in 2016 (adjusted for inflation in future years).
- Contributions are deducted from each paycheck throughout the year. However, the full annual contribution amount is available for use immediately (or after the first contribution is made). If the employee uses the full amount and then quits or is terminated prior to the end of the year, FSA funds do not have to be paid back to the employer.
Health Savings Accounts (HSAs)
- Can be established by an employer or by an individual, but only in conjunction with an HSA-qualified high deductible health plan (HDHP).
- Contributions can only be made while the account holder remains covered by an HDHP. However, the money can be used – without being taxed – for qualified medical expenses at any time in the future, even if the person is no longer covered by an HDHP.
- Can be funded (pre-tax) by employee payroll deductions or employer contributions, or by an individual.
- In 2016, maximum contribution is $3,350 for an individual and $6,750 for a family. The family contribution limit will remain unchanged in 2017, but the individual contribution limit will rise by $50, to $3,400.
- If an HSA is established by an employer and the employee quits or is terminated, the HSA goes with the employee, regardless of whether contributions were made by the employee or the employer.
- Money in the HSA that is not used for medical expenses remains in the account.
- HSA funds can be used for the same qualified medical expenses as FSA funds. And just like FSAs, prior to 2011, HSA funds could be used to purchase over-the-counter medications, but now a doctor’s prescription is required in order to use HSA money to buy OTC medications.
- If money is withdrawn for qualified medical expenses, it is never taxed. If it is withdrawn for other purposes prior to age 65, it is taxed and there is an additional 20 percent penalty applied (prior to 2011, the penalty was 10 percent). After age 65, money can be withdrawn without a penalty, but if it is not used for qualified medical expenses, income taxes will be owed.