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HSA & FSA: What to Know

Looking to save money for medical expenses while enjoying tax benefits? Then you may want to learn about Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA)!

An HSA is a type of savings account that allows individuals with high-deductible health plans to save money for medical expenses on a tax-free basis. The funds in an HSA can be used to pay for qualified medical expenses.

An FSA, on the other hand, is an employer-sponsored benefit that allows employees to set aside pre-tax dollars from their paychecks to pay for eligible medical expenses.

HSAs and FSAs are important because they provide us with a way to save money for health care expenses. They also both offer tax benefits, which can help reduce the amount of taxes we owe.

In this guide, we’ll discuss both types of accounts and compare key differences.

Health Savings Account 

A Health Savings Account is a type of savings account that helps pay for all types of qualified medical expenses. 

How HSAs Work
HSAs can help people save money on health care costs and get tax benefits. You must be enrolled in a high-deductible health plan to open one. The money put into an HSA is not taxed and can be taken out tax-free, but only if it is used for qualified medical expenses. If there is money left in the HSA at the end of the year, it stays there for future use. 

HSA funds can also be utilized for retirement. After reaching the age of 65, you are able to withdraw funds from your HSA for any purpose without incurring a penalty. However, if the funds are not used for qualified medical expenses, income tax will apply. 

Benefits of HSA

  • Tax-free Contributions

When you contribute money to your HSA, the funds are deducted from your pre-tax income, which means you don't pay any income tax on that money. Also, any interest or investment earnings on your HSA funds are tax-free.

  • Tax-free Withdrawals

When you withdraw money from your HSA to pay for qualified medical expenses, you also don't have to pay taxes on those withdrawals.

  • Unused Funds Accumulate Year Over Year

There is no "use it or lose it" rule for HSAs, and funds can accumulate year over year.

  • Funds for Qualified Medical Expenses 

You can use HSA funds to pay for qualified medical expenses. Examples include prescriptions, medical supplies, copays, etc. To see the full list of approved items, check out the IRS Publication 969.

Eligibility Criteria

According to the Internal Revenue Service (IRS), to qualify for an HSA contribution, you must meet specific eligibility criteria:

  • You must be covered under a high-deductible health plan.
  • You can’t be covered under other health coverage.
  • You can’t be enrolled in Medicare.
  • You cannot be claimed as a dependent on someone else's tax return. 

Limitations

  • Contribution Limits

According to the IRS, for 2024, individuals can contribute up to $4,150 to their HSA accounts, and families can contribute up to $8,300.

  • Plan Requirements

You must be enrolled in an HSA-eligible high-deductible health plan. For calendar year 2024, the IRS defines a " high-deductible health plan” as a plan with an annual deductible of more than $1,600 for self-only coverage or $3,200 for family coverage.

  • Penalty for Non-Medical Withdrawals

If you withdraw funds from your HSA for non-medical expenses before age 65, you will be subject to a penalty. The penalty is equal to 20% of the amount withdrawn, and you will also have to pay income tax on the withdrawal.

After age 65, you can withdraw funds from your HSA for any reason without penalty, although you will still have to pay income tax on non-medical withdrawals.

If you'd like to learn more about HSAs, check out our podcast episode 5 Advantages of Health Savings Accounts.

Flexible Spending Account 

A Flexible Spending Account (FSA) is offered by employers and allows employees to set aside part of their pre-tax earnings to pay for qualified medical expenses, dependent care expenses, or other eligible expenses that are not covered by insurance. 

How FSAs Work

With an FSA, you can contribute a portion of your pre-tax salary into the account, reducing your taxable income. 

Benefits of FSA

  • Pre-tax Contributions

When you contribute money to your FSA, the funds are deducted from your pre-tax income, which means you don't pay any income tax on that money.

  • Tax-free Withdrawals

Funds used from your FSA to pay for qualified medical expenses are not taxed.

  • Eligible Expenses

Generally speaking, anything that your doctor prescribes can be covered by FSA funds. This includes hearing aids, eyeglasses, and chiropractors. To see the full list of approved items, check out the IRS Publication 502.

Eligibility Criteria

Generally, employees must be enrolled in their employer's health insurance plan to be eligible to participate in the FSA. FSAs cannot be attained by those who are self-employed. 

Limitations

  • Use it or lose it

FSAs typically have a use it or lose it rule, meaning any funds left at the end of the plan year may be forfeited.

  • Contribution Limits

According to the IRS, the contribution limit through payroll deductions for 2024 for an FSA is up to $3,200.

  • Plan Requirements

The plan requirements for an FSA may vary depending on the employer and the specific plan.

  • Portability 

FSA is not portable so you can’t take it with you if you change jobs.

Comparison of HSA and FSA

Key Differences

Both HSA and FSA accounts are used for saving money for qualified health care expenses, but they do have a few key differences:

  • Different tax benefits

HSAs can be invested, and earnings grow tax-free, whereas, with an FSA, funds are not typically invested.

  • Eligibility

HSAs are only available to those who are enrolled in a High Deductible Health Plan, whereas FSAs are available for different types of health insurance plans.

FSAs are offered through the workplace; thus, you can’t get an FSA unless your employer provides one.

  • Accumulation of funds

Unused funds can be accumulated over years in HSAs, whereas FSAs have a “use it or lose it” rule.

  • Portability

Unlike an HSA, an FSA is not portable so you can’t take it with you if you change jobs.

 

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