HSA 101
December 2, 2020

What’s the Difference Between an FSA and an HSA?

The acronyms may be similar, but these two savings vehicles couldn't be any more different. 

FSA (Flexible Spending Account)

An FSA is a healthcare account that is sponsored and managed by your employer. The account's funds cover qualified medical expenses such as prescriptions, copays, alternative medicine, and more items that insurance might not fully cover. 

One of the biggest perks of an FSA that an HSA doesn't have is that an FSA can cover childcare costs. The 2020 contribution limit is $2,750, and the funds have to be used by the end of each plan year, or the money goes back to your employer. Like an HSA, the money that goes into your FSA from your payroll is pre-tax, which reduces your taxable income. 

TLDR; You can lower your taxable income with an FSA, but you lose all of your saved money if you don't pay close attention to deadlines.

HSA (Health Savings Account)

An HSA is a savings vehicle available to people who are on a high-deductible health plan (HDHP). HSA's are paired with HDHPs to help offset the higher out-of-pocket costs those with high deductibles can face. The contribution limits for 2020 are $3,550 for an individual and $7,100 for families. 

HSA's are often offered in employer benefit packages but are also available to self-employed individuals, small business owners, and those who receive healthcare from state or federal marketplaces. They're unlike any other savings account because the funds go in tax-free, grow tax-free, and can be spent tax-free on qualified medical expenses. Additionally, your HSA dollars can be invested pre-tax, with any gains coming back to you totally tax-free. And yes, it gets better. An HSA belongs to YOU, not your employer, and is not subject to any use-it-or-lose-it rules. Oh, and let’s not forget that an HSA also transitions into a traditional retirement account when you turn 65!

TLDR; The HSA is a powerful, triple-tax advantaged vehicle that stays with you forever.

So how do they really compare to each other?

The similarities pretty much start and end with their ability to decrease taxable income and spend on qualified healthcare expenses. Other than that, the FSA isn't as flexible as the name makes it sound. See our breakdown below.

How do I decide which one is right for me?

It really depends on your needs and whatever your current situation is. Maybe your employer only offers an FSA and doesn't have an HSA option. An FSA is still a great partner for a health plan with a higher deductible and can help you cover healthcare costs as they come up. If you're future-oriented and have big goals for your life after retirement, an HSA has all of the tools you need to grow your wealth--and it even turns into a traditional retirement account when you hit 65. Plus, you have the opportunity to build your investment portfolio with an HSA. 

All in all, they both have their strengths and weaknesses, and it deserves the thought and effort of a large purchase to ensure you're making the right choice for you.

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