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How is an HSA different from an FSA?

Feb 11, 2021
Empower Insights

Understanding two popular ways to get a tax break on medical expenses

At first glance, health savings accounts (HSAs) and flexible spending accounts (FSAs) seem quite similar. They both offer ways to pay for a portion of your — or your family’s — medical expenses with pretax dollars. And in both cases, you make tax-deductible contributions to an account and then draw from it to pay for certain eligible medical expenses.

But the two accounts have many differences worth paying attention to. Here’s what you need to know.

 

 

HSA

FSA

Who’s eligible

Anyone enrolled in a qualifying high-deductible health plan (HDHP) who has no other coverage

Anyone with health insurance through an employer

Who owns the account

Employee

Employer

Who’s covered

You, your spouse, dependents and children under 27

You, your spouse, dependents and children under 27

What you can use it for

  • Current healthcare expenses
  • Healthcare expenses in retirement

Current healthcare expenses

What’s covered

  • Qualified health expenses as defined by the IRS
  • Insulin
  • Prescription drugs and prescribed OTC drugs
  • Premiums for long-term care insurance and COBRA coverage
  • Qualified health expenses as defined by the IRS
  • Insulin
  • Prescription drugs and prescribed OTC drugs

 

 

Withdrawals for non-medical expenses

  • If you’re under age 65, you pay income taxes and a 20% penalty on the withdrawal
  • If you’re age 65 or over, you pay income taxes on the withdrawal

Not allowed

How to use it

  • Pay for the expense with your HSA debit card

or

  • Pay out of pocket and reimburse yourself later

Make a claim through your employer for reimbursement; you’ll need proof of both the expense and the fact that your insurance didn’t cover it

Use-it-or-lose-it provision

None; your HSA assets roll over from year to year

  • In general, you lose any unspent funds at the end of the year
  • Some FSAs let you roll over $500 into the next year
  • Others give you 2½ months into the next year to spend your balance1

Ability to invest

Yes; many HSA providers allow consumers to invest in mutual funds

No

Ability to save for healthcare costs in retirement

Yes; HSA savers can hold their investments indefinitely

No

2021 contribution limits

  • $3,600 for individuals in an HDHP
  • $7,200 for a family HDHP
  • Enrollees who are age 55 or older can contribute an additional $1,000

$2,750

 

 

Read about the impact HSAs can have on retirement savings

1 Healthcare.gov, https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts/

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