Flexible spending accounts and health savings accounts are confused so often that many people consider them to be the same things, but they're not. Not even close. Let's start by defining what they are, so we can see how they're different.
What Are They?
Flexible Spending Account We’ll start with flexible spending accounts because they were created first. A flexible spending account (FSA) is a benefit that some companies offer that allows their employees to set aside money, on a pre-tax basis, for certain health care and dependent care expenses.
Health Spending Account A health spending account (HAS) is a type of flexible spending account. It is the most common type. HSAs are accounts where you can deposit your money and withdraw it to pay health-related bills not covered by health insurance. This includes co-pays, over-the-counter medicine and treatments and surgeries. The money you spend from your health spending account can be deducted from your income, reducing your tax obligation. These accounts particularly benefit people with large health insurance deductibles -- at least $1,500 for individuals and $3,000 for families.
What Do They Have In Common?
For one thing, they're voluntary. No one can or will force you into opening a flexible spending account or a health savings account, though by the end of this post, I assume many people who don't use one will want to do it, or at least get more information about them. The other similarity comes down to the tax benefit. The money you spend from both types of accounts reduces your tax burden.
What Are The Differences?
The biggest and most important difference is that the money in your HSA can roll over from year to year and continue to grow tax-deferred while money in your flex plan must be spent by the end of the year. If you don't use the money in your flex account, you'll lose it. Your company keeps whatever is left, so it behooves you to only deposit money in the account that you know you'll spend that year.
Additionally, you can only open a health savings account if you have health insurance. Flex accounts are not tied to insurance so you don't need to have health insurance to open one. However, not just anyone can open a flexible spending account. You can do only it if your employer offers it as a benefit.
Finally, flexible spending accounts can be used for medical expenses as well as child- or adult-care expenses while the HSA is only for medical expenses.
What Are The Benefits Of A FSA?
Deposits that go into your flex accounts can be made before tax is taken out of your pay, reducing your overall tax burden. Health insurance covers treatment that you need, not voluntary surgeries, like Lasik eye surgery and plastic surgery. You can use money in your flexible spending account for all expenses, including voluntary ones. Many people with flex accounts negotiate a flat fee with doctors and other medical providers then have that amount deposited into the account. Flex accounts have no limits, unlike HSA accounts, which limit deposits to $5,420 a year.
What Are The Benefits Of A HSA?
A family can put a maximum of $5,420 a year into its HSA account, and all payments can go in pre-tax and can stay there for an unspecified amount of time or be withdrawn tax-free for medical expenses not covered by health insurance. After money is put into a health savings account, it acts like a typical individual retirement account (IRA). It can be invested in various stocks, bonds, mutual funds or other investment products. Call it a "Health IRA." Unlike a flexible spending account, you don't have to use it or lose it. You don't have to withdraw any money from a health savings account if you don't need it. You can continue to deposit money in the account and watch it grow. After you retire, you could have tens of thousands or even hundreds of thousands of dollars to spend on health-related expenses.
Because health savings accounts make the most sense for people with high insurance deductibles, HSA policy holders are paying relatively small insurance premiums. Paying high premiums for insurance you never use is a big waste. But the money deposited in a health savings account is much less likely to go to waste. Those who have HSAs are more likely to shop around to get the best deal for their money. Many people with comprehensive insurance who only pay co-pays tend to go for the "carte blanche" approach, taking all the treatment offered to them. This drives up the overall cost of insurance, as the insurance companies pass these costs off to the masses through higher premiums.
As you can see, HSAs and FSAs have their pros and cons, but both can help you pay your bills and ease your tax burden. What's not to like about that?