Written by: Annie Hambach (Aug. 20,2010)
Flexible Spending Accounts (FSA’s) and Health Savings Accounts (HSA’s) are both great ways to reduce your income taxes by paying for medically-related expenses with pre-tax money- that is, money deducted from your paycheck before income taxes are calculated on your pay. Both types of accounts work similarly, in that you can deposit pre-tax money into the account, and use the account to pay for various tax-deductible medical expenses as they occur. But the two types of accounts operate quite differently.
Our company offers both an FSA and HSA option for the employees on our payroll, depending on which health insurance plan they select. I explain and compare the differences in the following ways:
1. Eligibility to Contribute:
FSA: Eligibility is set by your employer. If you have a high deductible health insurance plan, you may only contribute to a “limited purpose” FSA used for dental, vision, and other non-medical expenses.
HSA: You are eligible if you have a high deductible health insurance plan that meets IRS definitions. For 2010, the single deductible needs to be at least $1200 and family deductible at least $2400.
2. Annual Contribute Dollar Limits:
FSA: Currently your employer sets a maximum limit or places no limit. Beginning in 2013, healthcare reform laws will cap the limit at $2500.00.
HSA: In 2010, the single coverage limit is $3050.00. The family coverage limit is $6150.00.
3. Account Ownership:
FSA: Your FSA account is set up and owned by your employer.
HSA: The HSA account is a bank account owned by you, regardless of where you work.
4. Access to Your Money:
FSA: You have access to your entire annual election amount any time during the year, even if you have not had all of the money deducted yet from your check.
HSA: You only have access to what has actually been deposited into your HSA to date, like any other bank account. If you have a big claim and don’t have enough in your HSA to cover the claim, you will need to pay for the cost out-of-pocket, and reimburse yourself later as more funds are deposited.
5. Use It or Lose It:
FSA: Yes, any money you do not spend in your FSA at the end of the year is forfeited back to the company. On the flip side, if you happen to leave before the year is over, and you have already spent more FSA money than what has been deducted from your paycheck, that extra money is yours to keep.
HSA: No, any unused funds in your HSA at the end of the plan year are yours to keep, and stays in your account indefinitely until you spend it.
FSA: Your employer or FSA provider may ask you to prove that the money spent was eligible, by submitting a copy of the receipt.
HSA: Your employer or HSA provider does not “police” the account, but it’s important that you keep all receipts and documentation for your records in the event of a personal IRS audit.
7. Option to Change Contributions:
FSA: You can only change your election amount if you experience certain qualifying events such as marriage, divorce, birth of a child, etc. Otherwise you are “locked in” until the next open enrollment.
HSA: You can change your election amount on a monthly basis, as long as it does not exceed IRS limits, and the amount is in proportion to the number of months you were covered under a high deductible health plan.