HSA vs. FSA
Confused by Health Savings Accounts (HSA) or Flexible Spending Accounts (FSA)? You're not alone. Since both aid with healthcare expenses and are tax-free, they can appear to be quite similar. However, there are some major differences between the two - including eligibility, contribution limits, rollover and more.
We're closing the gap on HSA vs. FSA for 2019.
HSA vs. FSA: eligibility
So you've just enrolled in Medical and are looking to add a spending account to your benefits. Should you choose an HSA or an FSA? The first thing to figure out is eligibility. For example, HSAs are only available to those who have enrolled in a High Deductible Health Plan (HDHP) and aren't covered by any other medical plans (including Medicare). On the other hand, FSAs are available to anyone that's enrolled in a Medical Plan or if an employer offers group coverage. Additionally, you cannot be enrolled in an HSA and FSA in the same year (unless it's a Limited Purpose FSA - more below), so it's important to carefully consider both options to determine which plan best suits your needs.
HSA vs. FSA: 2019 contribution limits
FSAs have a strict 2019 contribution limit of $2,700. HSA contribution limits are dependent on the coverage tier of the HDHP that you enrolled in. The individual HSA limit is $3,500 and the limit if enrolled in a family coverage tier $7,000. HSAs are also unique in the fact that employees above the age of 55 can add an additional "catch up" contribution of $1,000, even if they are at the contribution limit.
FSAs can be funded with pretax dollars by employees, employers or both, and employees can access the money in the account before it is paid in. The account is owned by the employer. HSAs are owned by the employee with contributions from the employer and the employee. The amount the employer pays per paycheck is dependent on how much the employee funds. Unlike FSAs, HSA money can only be accessed when it is paid into the account.
Contributions for FSAs can only be changed during Open Enrollment and after qualifying life events, such as: marriage, birth, divorce, or a spouse losing coverage from their employer. HSA contributions can be changed at any time. If contributed through a cafeteria plan, the employer must allow an employee to change his or her HSA contribution at least once a month.
HSA vs. FSA: eligible expenses
Expenses paid by both accounts are very similar. You can use these accounts to pay for prescription medication, co-pays, deductibles, and other qualified health expenses. You can find the list of eligible expenses here - www.irs.gov/publications/p502. The money contributed to either account is tax free!
Each account has specific rules for non-eligible expenses. HSAs come with a strict penalty if the funds are used for non-eligible expenses and you are under the age of 65. The penalty will be your normal income tax, plus another 20% tax penalty. For health FSAs, no withdrawals are allowed except to reimburse medical expenses.
Because FSAs are technically owed by the employer, all funds not spent in an FSA account are forfeited during the event of termination. The funds in an HSA are not forfeited after termination and can even be carried over to a new employer.
HSA vs. FSA: rollover limits
As of 2019, up to $500 of unused 2014 FSA funds could be rolled over, provided the employee did not go over the contribution limit. Any unused funds other than the $500 rollover will be expired and forfeited at the end of the year. HSAs never expire and any funds in the account will roll over.
Limited purpose FSAs
A Limited Purpose FSA is a special type of FSA that you can use when you have a Health Savings Account (HSA). They are similar to regular FSAs, the difference being that the only eligible expenses for this account are dental or vision expenses (including dental cleanings, fillings, vision exams, contact lenses, lens solution/cleaner and prescription glasses). Because of this, some employers allow employees with Limited Purpose FSAs to also have HSAs as well.
Key HSA vs. FSA takeaways
- HSAs and FSAs offer tax benefits and have annual contribution limits.
- You must have a high-deductible health plan (HDHP) to be eligible for an HSA.
- HSA funds roll over year after year.
- Some HSAs offer investment options.
- With an HSA, holders cannot spend more than what has been deducted from their paycheck. However, they can file for reimbursement later in the year.
- You cannot contribute to an HSA and a traditional FSA in the same year.
- Unless the FSA plan has a grace period or rollover policy, any funds not spent by the end of your plan year will be lost.
- You can use your FSA to cover eligible health care expenses early in the year if you contribute what's necessary to cover those expenses by the end of the year.
- With HRAs, employers may limit which health expenses are eligible and the amount you’re able to roll over from year to year.
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