HSA and FSA: Two Distinctly Different Savings Plans
By Stacy Torkelson, CIP, CHSP, CFC
Is an HSA basically the same as an FSA?
No. A health savings account (HSA) and a health flexible spending arrangement (FSA) are both tax-favored accounts designed to pay for medical expenses. But this is where their similarities end, as each is subject to very different rules.
An FSA can only be offered by an employer, and the only way an individual can fund an FSA is by electing to contribute a specific amount prior to the start of their employer’s plan year (usually the calendar year). Then, over the course of the year, deductions are taken from an employee’s wages every pay period to fund the FSA contribution. An employee is not able to adjust the amount they contribute once they make the election. In contrast, an HSA can be established through an employer or by an individual, as long as the individual has a high deductible health plan (HDHP) and is not covered by a non-HDHP. Also, HSA contributions are flexible and may be changed during the year.
Additionally, with an FSA, the funds must be used by the end of the plan year (December 31 for most plans). If the money is not spent by then, the employee loses it. Some employers will allow for an additional period of time for employees to spend their FSA. An employer may permit either a grace period or a carryover, but not both. A grace period allows employees an additional 2½ months to spend any leftover money in their account; for calendar year plans employees would have until March 15 to spend their funds from the prior year. Or, if an employer allows for a carryover, they can permit up to $500 in unused FSA money to roll over so that it can be spent for the remainder for the entire next year. One of the great advantages of having an HSA instead is that the account owner never loses the funds and there is no requirement to spend them.
Another major difference between an HSA and an FSA is that an employee is required to provide proof of a medical expense before being reimbursed from an FSA. There is no requirement to provide proof of medical expenses before taking an HSA distribution.
Is there any advantage of contributing to an FSA over an HSA?
Individuals may prefer some aspects of FSAs over HSAs. One key feature of an FSA is “uniform coverage.” This means the amount chosen to be contributed to the FSA for the year is required to be available to the account owner immediately, even before deferrals from employee pay are made to the FSA.
For example, if someone who is paid every two weeks elected to defer $2,700 (the maximum FSA contribution for 2019) into an FSA for 2019, approximately $103 would be contributed to the FSA from each paycheck ($2,700 divided by 26 pay periods). In February after having a surgery that costs more than $2,700, that person can request a reimbursement of the full $2,700 from her FSA and receive a check for that amount, even though she only deferred $415 through payroll so far for the year. And if she terminates employment in March after only deferring $623, her employer cannot ask her to pay back the remaining amount that was reimbursed but not yet deferred. In contrast, she is only allowed to take from her HSA what has actually been deposited into the account, plus earnings; she is not permitted to overdraw or borrow from her HSA.
The FSA can also be used to cover expenses of nondependent children who have not attained age 27 as of the end of the taxable year. This can be helpful to parents who still want to help older children who are not yet financially stable. To use HSA money on children, the children generally must be claimed as a dependent on the HSA owner’s tax return.
Another FSA benefit is that because distributions from FSAs must be verified by an independent third party, the IRS does not require any additional information from the taxpayer. With an HSA, on the other hand, receipts must be kept in case the HSA owner is ever audited. HSA owners are also required to file Form 8889, Health Savings Accounts (HSAs), for a year that nonpayroll HSA contributions are made or HSA distributions are taken.
Can you participate in both an FSA and an HSA for the same year?
One requirement to be HSA-eligible is that you cannot be covered by a health plan that is not an HDHP. Because FSAs are considered to be health plans, if the FSA covers medical costs before the minimum deductible is met, the FSA would make an individual ineligible for an HSA. For example, a “general purpose FSA” pays for all types of medical expenses. Thus, someone with a general purpose FSA—or who is married to someone with a general purpose FSA that covers the medical expenses for both of them—is ineligible for an HSA.
Individuals are allowed to have a “limited purpose FSA” and make HSA contributions for the same year. A limited purpose FSA only reimburses for dental, vision, and preventative services. “Post-deductible FSAs,” which will not pay for medical expenses until a minimum specified deductible is met, are also permitted with HSAs, but are not common.