HSA or FSA? TBH, Healthcare Acronyms are a PITA
HSA or FSA? HRA or HIA? HMO or PPO? IDK, right?
The healthcare industry is famous for tossing around terms, abbreviations, and acronyms that are confusing at best, perplexing at worse. Tackling the whole list would take eons, so today we’re going to take a deep dive into the two acronyms we most frequently get questions about from our members: HSA and FSA.
First, a little high-level clarity.
HSA stands for health savings account. A health savings account is a tax-free fund that eligible employees and self-employed individuals can use to pay for qualified out-of-pocket healthcare costs. You can only have an HSA if you have a high deductible health plan, or HDHP. (There’s another acronym for the list.)
FSA stands for flexible spending account. A flexible spending account is a tax-free fund that employees (not self-employed individuals) can use to pay for qualified out-of-pocket healthcare costs. Any employee can open an FSA, regardless of the type of health insurance they have.
How are they similar?
HSAs and FSAs have a few things in common. They both offer tax advantages if you contribute pre-tax dollars to your account. Employees, employers, or both can contribute to the accounts.
They can both help you save money to prepare for future medical expenses, or they can be used to cover current medical expenses including copays, deductibles, qualifying prescriptions, and certain medical equipment. Employers aren’t required to offer HSAs or FSAs, nor are they required to contribute to an employee’s plan if they do decide to offer one or the other.
So what’s the difference between HSA & FSA?
HSA: It’s all yours! Your HSA will follow you when you change employment or retire. Even if you become unemployed, you can contribute as long as you have an HDHP.
FSA: Unless you’re eligible for FSA continuation via COBRA, you’ll lose your FSA funds if you change jobs.
2. Contribution limits
HSA: In 2020, limits for health savings accounts are $3,550 for individuals and $7,100 for families, with a catch-up contribution limit of $1,000 for people over age 55. It’s important to note that these limits include self-made contributions as well as employer contributions.
FSA: In 2020, an individual can contribute up to $2,750 to their FSA. If employers provide contributions, that amount can be deposited in addition to the amount employees elect.
3. Contribution changes
HSA: You can adjust your contribution at any point, for any reason.
FSA: You can only adjust the amount you contribute during open enrollment, or due to a change in employment or family status.
4. Access to funds
HSA: You’ll only have access to what has already been deposited into your HSA account, so it’s important to add more if you know a big medical expense is looming on the horizon.
FSA: No waiting for funds here. At the beginning of the plan year, you can access your annual election, regardless of what you have contributed to date.
5. How to pay
HSA: Owners can use their funds to cover a qualifying expense by paying with their designated HSA debit card at the time of service, or once they’ve received a bill. Alternately, they can receive reimbursement after paying for an eligible expense with a personal card, check, or cash. At tax time, any distributions must be reported on Form 8889.
FSA: In order to be reimbursed, an employee needs to submit a claim and a written statement certifying that an expense isn’t covered by a different plan. FSA contributions do not need to be reported on tax forms.
6. Tax benefits
HSA: HSA contributions are tax-deductible, so they will reduce federal income taxes owed. In addition, funds grow tax-free over time. And finally, the funds can be withdrawn without being taxed, as long as you use them for qualified medical expenses.
FSA: FSA contribution aren’t tax-deductible because FSAs are funded through salary deferrals, but since the account uses pretax dollars, your contributions will still help reduce your taxable wages.
7. Rollover options
HSA: Again, it’s all yours. Forever and ever, amen.
FSA: Your unused balance will be forfeited at the end of each year unless your employer allows a rollover (capped at $500). Employers also frequently allow a grace period of 2.5 months to use funds after year’s end.
Whether you have an FSA or HSA account, so many expenses are eligible that it can be hard to keep track. Want to know if something makes the cut? Visit the IRS website for a full list. Among the items that apply to caregivers are:
- Incontinence supplies
- Blood pressure monitors
- Diabetic monitors
- Compression socks
Regardless of whether you have an HSA or FSA, you’ll benefit by reducing your taxable income, decreasing your tax liability, and building peace of mind for the near or long-term future.
TX for reading, and HAGD!
(Translation: Thanks for reading, and have a great day!)