In the alphabet soup of financial acronyms, it is easy to get Flexible Spending Accounts and Health Savings Accounts confused. If you’re wondering what the key differences are between these strong financial options, rest assured – we have you covered. Below, we highlight the key differences between these two account types and identify reasons why one may make sense for you.
First things first: what are these accounts?
- A Flexible Spending Account (i.e. “FSA”) is an account you and/or your employer can fund to use towards healthcare or dependent-care expenses. Any money set aside for this purpose is not taxed, so you will save an amount equal to whatever you would have paid in taxes on these “set aside” funds. You can use your FSA by submitting a claim or proof of the qualifying medical expense to your employer, which will then allow you to be reimbursed accordingly. You must use up your FSA funds annually as they don’t roll over from year to year.
- A Health Savings Account (i.e. “HSA”) is an account you and/or your employer can fund with pre-tax money coming right out of your paycheck to use towards medical or health-related expenses. The balance rolls over year to year and you can earn interest on the funds and/or invest them for future growth.
What do these contributions cover?
- With a FSA, you can use the funds you contribute for yourself, your spouse, or your dependents. These funds can go towards certain medical and dental expenses, co-pays, over-the-counter medications, prescriptions, and select medical device equipment. You can also use a portion of the FSA to fund your dependent permissible dental or childcare needs. For a full list of permissible dental and medical expenses, click here!
- With a HSA, you can use the funds you contribute for yourself, your spouse, or your dependents. These funds can go towards certain health and medical-related expenses, which you can read more about here!
How much can you contribute to each account?
FSAs:
- According to the IRS, the maximum amount an individual can contribute to the Healthcare FSA for 2020 is $2,700. The maximum amount you can contribute to the Dependent Care FSA is $5,000 for a married couple filing a joint tax return or if filing separate tax returns are $2,500 per spouse.
- The key here is to make sure you think strategically about how much you are contributing. Generally speaking, you cannot roll over the funds from year to year, so if you don’t use the designated funds by the annual deadline, you will lose access to them.
HSAs:
- For 2020, you can contribute up to $7,100/year for a family or up to $3,550/year for an individual (and those 55+ can contribute an extra $1,000/year).
- Any money you contribute to a HSA can be rolled over from year to year if left unused. Plus, these funds can be invested as part of a long-term growth strategy.
Can you invest the funds?
With a FSA, the funds set aside are purely to be used for medical and health related purchases within that calendar year. On the other hand, with a HSA, funds contributed to this account can be invested (similar to those in your 401(k) plan) and any growth or earnings can be used to fund your medical and health related expenses tax-free.
Can you have both types of accounts?
Typically, no. Most of the time you will need to choose which account to fund (assuming you’re eligible for both). Be sure to do your research and speak with your HR representative to understand what options are available to you through your employer when making this decision.
An important distinction to consider…
A FSA is an account that is typically provided to an employee by the employer. You don’t “own” the account, as you would with an HSA, so be sure you understand what you truly are entitled to. If you should leave your current employer, many times you will have to forfeit the access to those funds as the FSA is non-transferrable. Conversely, an employer does not own your HSA so you have the right to the funds no matter where you choose to work, provided you still have a high-deductible health plan.
When it comes to making your decision, make sure you’ve considered all of the different factors involved. Both accounts offer tremendous tax advantages but are used in different ways. Depending on what your specific needs are, you may find yourself touting the flexibility of the FSA or the investment capabilities inherent within the HSA. If you’re making this decision, consult your benefits team to understand your available options, consider your short-term and long-term financial goals, and choose wisely.
This post is sponsored by HealthSavings. We’d like to thank them for their partnership and dedication to helping educate women on their retirement options and empower them to own their financial futures.
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