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Updated: Mar 19

The complete guide to the difference between a health savings account (HSA) and a flex spending account (FSA)

All you need to know about the difference between a health savings account and a flex spending account

Understanding your health insurance benefit plans

Whether you’re a young professional entering the workforce (ahem, and leaving your parents' medical plan), or you’re an already-established adult looking to better understand your medical savings, you’re in the right place.

First step? Evaluate your health insurance plan options. From HMOs and PPOs to life insurance, we'll coach you through every step of the way.

Healthcare spending accounts

FSA and HSA accounts are both tax-advantaged accounts, resulting in payroll tax savings. Essentially, putting money in these accounts typically leads to less income taxes due come tax time. But, be aware these plans come with some limitations and these funds are designed for healthcare costs.

What counts as healthcare costs?

We all have healthcare needs, some just bigger than others. We spend our "healthcare dollars" on everything from princess-themed band-aids and monthly prescription pickups to procedures and surgeries. HSAs and FSAs can help you better manage your finances when it comes to medical care for yourself and family. Whether you’re planning for a baby, helping aging parents with money, or just looking to better manage your finances, Pocketnest is here to help!

More on the specifics of which healthcare costs are HSA- and FSA-eligible later.

HSA Basics

At its basic level, a health savings account (HSA) is a medical savings account. You are eligible to open a HSA if you are a taxpayer in the United States and enrolled in a qualified high-deductible health plan. The funds you contribute to an HSA account are not subject to federal income tax at the initial time of deposit.

If you’re qualified with a high-deductible plan, you can open up your HSA on your own or with your employer. From there, you'll likely get a debit card to easily charge healthcare costs. You can make changes to your pre-decided contributions as long as the alterations do not exceed limits.

To be eligible… Your existing medical insurance plan must have a minimum deductible and qualify as a high deductible plan. Also, you can neither be enrolled in Medicare nor declared as a dependent on someone else’s plan.

Healthcare costs covered by HSAs

HSA-eligible healthcare costs include

  • eligible health care

  • dental

  • vision

  • deductibles

  • co-payments

  • coinsurance

  • over-the-counter medications and products

  • medical related transportation

  • and many others

You may use your HSA funds for healthcare costs for yourself, your spouse, and/or eligible dependents such as your children, siblings, or parents that are pre-approved by your tax information. This can be especially helpful if you’re helping aging parents with money.

How do HSAs work?

The HSA money you save stays with you, but you can only spend money you have already saved and portioned into your account.

  • Changing jobs? Your HSA funds aren't affected if you change employers. However, some employers contribute to your HSA fund, so be sure you know which employee healthcare benefits you're leaving with your old job.

  • Rollovers and long-term outlooks. The funds in your HSA roll over year over year and thus can be aggregated for long-term medical savings such as retirement. This lets you plan ahead!

    • Accrued savings can be withdrawn tax-free from your HSA after age 65.

    • HSAs can sometimes even help you contribute to life insurance, but be sure your plans are eligible.

  • Limits. These plans come with annual contribution limits that can change year by year

Be forewarned! non-approved expenditures or spending on non-medical goods or services must be declared on tax statements and may be penalized.

FSA Basics

Flexible spending accounts (FSAs) can act like a line of credit. Imagine this: you only have $100 in your account but want to buy a $300 pair of prescription glasses, you can… as long as you're financially on track (based on your salary) to save at least $300 by year-end. These accounts are arrangements through your employer that enable you to pay for many out-of-pocket medical expenses with tax-free dollars. Meaning, these funds are deducted out of your paycheck before they're taxed.

These are not long-term savings plans, and you can't often make changes to these plans without extenuating circumstances.

How do FSAs work?

  • Contribution limits? There are annual contribution limits on these accounts. If you are married and both you and your spouse have FSAs with your employers, you both can make contributions to each of your accounts.

  • Rollover policy. Sometimes, you can carry over a portion of your FSA into the following year’s plan. Alternatively, some employers may allow an additional two and a half months to spend the previous year's contributions. Yet, a lot of the time, if you don’t use it, you can lose it.

  • How you can spend your funds. Like HSAs, you can use your FSA funds in pay for certain medical and dental expenses for yourself, your spouse, and your dependents.

    • Deductibles and co-payments, but not insurance premiums.

    • Prescription medications and over-the-counter medicines—as long as a doctor's prescription is provided. (Reimbursements for patients that require insulin are allowed without a prescription.)

    • Medical equipment like crutches, bandages, and diagnostic devices like blood sugar test kits can be paid for with FSAs.

Key Takeaways of HSA vs. FSA

  • HSAs are owned by the individual and you do not lose these funds at the end of the year. They have the potential to offer far greater tax advantages and savings due to their larger freedoms and flexibility.

  • FSA don’t have as much adjustability because they are set up with an employer.

  • Both HSA and FSA accounts are pre-tax accounts with contributions that can be made directly from your paychecks.

  • You can use HSA and FSA funds on copays, medical bills, vision expenses, and more.

Feeling good about health insurance plans? Good! Jump into the app and check in on your To-Do List! After all, financial wellness only takes 3 minutes a week. You got this!


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