Q. "What is the difference between an HSA and a FSA?"
Answer:
HSA’s and FSA’s are both pre-taxed health spending accounts where the employee contributes monthly to help pay for medical care expenses, copays, and vision care.
The most significant difference between flexible spending accounts (FSA) and health savings accounts (HSA) is that an individual controls an HSA and contributions roll over to the next year, while an employer owns a FSA and use of the funds is less flexible.
Both accounts offer tax benefits and have annual contribution limits. You contribute funds to an HSA and FSA, but only your employer can contribute to your HRA*.
When it comes to flexibility, tax-free growth, and portability, an HSA wins over the more limited FSA.
HSA Specific Features:
The money you save always stays with you, but you can only spend money you've already saved. It accumulates, rolls over and some plans have the option to invest the funds
A good option if you are generally healthy and don’t go to the doctor much
To qualify, you must have a high deductible health plan
Cannot spend more than the funds deducted from their paychecks but can file for reimbursement later in the year
With HRAs, employers may limit which health expenses are eligible and the amount able to roll over
FSA Specific Features:
An FSA is like a line of credit. For example, if your account balance is $50 in January but you'd like to buy $200 prescription eyeglasses, you can as long as you're on track to save at least $200 by year's end
Best with a low deductible plan, meaning you likely go to the doctor more
Any funds not spent by the end of your plan year will be lost unless the plan has a grace period or rollover
Near the end of the year, you can use leftover money to stock up on medical supplies like bandages and OTC medications
*An HRA, or health reimbursement arrangement, is a type of health spending account provided and owned by an employer. The money in it pays for qualified expenses, like medical, pharmacy, dental, and vision, as determined by the employer. HRAs are usually unfunded notional accounts, with no cash value as opposed to an HSA which is a tax-advantaged account that can pay for IRS-defined health care expenses, including long-term care and COBRA premiums.