What is an HSA or FSA?

FSA vs HSA What Is a Flexible Spending Account (FSA)?

An FSA is a tax savings tool to help pay for qualified out-of-pocket healthcare expenses on high deductible plans. It is a tax-advantaged savings account established by your employer that allows you to stash money away for yourself, your spouse or dependents.

For starters, since you can only establish an FSA with your employer, it means your employer owns your FSA account. If you separate from your job, you are required to forfeit your FSA funds. For 2022, you can contribute up to $2,850 into a healthcare FSA and your employer may also contribute on your behalf. However, the IRS does not require your employer to do so.

Advantages of an FSA

One great advantage about an FSA is that your funds are immediately made available the day you enroll. For example, if you decide on Jan. 1 to contribute $2,400 annually with monthly pretax contributions of $200, you will have access to the entire $2,400 at the start of the year. This means if you have a qualified medical expense of $1,500 but your FSA account does not have the entire funds to cover it, your FSA administrator will still pay the entire claim.

And while that is great news, there are some disadvantages to an FSA.

Disadvantages of an FSA

The primary disadvantage is that, typically, most FSA accounts have a “use or lose it” feature, which means you need to spend all of your FSA funds before the end of the plan’s year. If you fail to do so, you will forfeit your FSA funds. Some employers may elect one of two features that can provide some flexibility with unused funds. These features include an extended grace period or a rollover provision.

What Is a Health Savings Account (HSA)?

Similar to an FSA, an HSA also allows you to stash money away into a pretax account, but works a little differently. Unlike an FSA, to contribute to an HSA you must qualify and meet the following requirements:

  • You are not claimed as a dependent on anyone else’s tax return.

  • You are not enrolled in Medicare.

  • You are covered

under a high deductible health plan (HDHP).

An HDHP is any healthcare insurance plan with a high deductible amount. For 2022, the minimum deductible amount for an individual HDHP is $1,400 and $2,800 for a family plan. Unlike an FSA, you own your HSA account and therefore it is portable, which means that if you separate from your employer, you can take your HSA funds with you.

You can also establish an HSA either independently or with your employer. If you have an employer-sponsored HSA account, the amounts you contribute are not subject to payroll or income taxes. However, if you set up your HSA account on your own, you can deduct your HSA contributions on your federal income tax return. You qualify for the tax deduction whether you elect to itemize your deductions or not.

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