What is the Difference Between an FSA and an HSA?
A health savings account (HSA) and flexible spending account (FSA) are savings accounts that allow you to set aside money to pay for qualified medical expenses tax-free. If this is through your employer, this is deducted from your pay pre-tax automatically.
The 3 main differences are:
- FSA is not tied to any insurance plan, but the HSA can only be used with a high-deductible health plan (HDHP).
- HSA will roll over from year to year, FSA does not. Sometimes, the employer will allow for a certain amount (according to IRS regulation) from your FSA to rollover as long as you are an active employee.
- HSA is pay-as-you-go, FSA allows you to use all the funds right away.
It is important to understand these differences when you are trying to decide on what to enroll in. Here, I collected some of the main tips that will help you to use the most of your spending accounts. Don’t let that money go to waste!
HSA Tips
Tip #1: Contribute as much as possible.
An HSA has a much higher limit than an FSA. This is a benefit because it is always paired with a high-deductible health plan. With the high deductible health plan’s deductible being so high, contributing as much as you can is an important step in avoiding financial hardship.
Even if you do not believe you need it right now, you can use it on your spouse’s and/or kids’ medical expenses. If you are single and still don’t want to contribute much, remember, you have no backup if something happens to you. Medical bills rack up fast. It is to your benefit to save this tax-free money instead of worrying about if/when a medical issue comes up.
Tip # 2: Use this as another way to save for retirement.
Let’s say you never get sick for many years and you are always contributing to your HSA. You are probably thinking, “Menty made me waste my money!” No, you should always have savings for your medical expenses. If you don’t ever use the funds or have funds left over, these funds accrue interest and can be deducted once you are eligible for retirement.
Just like a 401k, the money is deducted from your pre-tax check. As long as you do not touch it, the money will grow. To find out how much interest your HSA accrues, you will need to reach out to the financial institution directly.
Tip #3: Save all receipts.
Whenever you do use your HSA you want to make sure to keep all invoices you receive. You may be asked to prove what the payment was for. Or, if you want to be reimbursed for a medical expense you will need to submit the invoice.
FSA Tips
Tip # 1: Use all the funds before the end of the year.
FSAs get a bad rep, but they are honestly really great in my opinion. I like them because the full amount you enroll in is available right away. As someone who often has something that I need medically, whether it’s prescriptions, contacts, or co-pays, I use my funds quickly!
Unfortunately, a lot of people either forget they enroll in this or just forget to use it before the end of the year. This is such an important thing to pay attention to. Your FSA doesn’t roll over and you cannot take it with you if you leave the company. So if you don’t use all the funds, guess who keeps the money? Your employer!
So make sure to use up the money you have in the account. There are plenty of things you can use it on like feminine products, glasses, contacts, chiropractors, etc. If you want the full list, click here to learn what else you can use your FSA funds on!
Tip #2: Use an FSA calculator before enrolling.
An FSA calculator is a helpful way to figure out how much you need to contribute. Unlike an HSA, you don’t want to over-contribute. The FSA Store has a great calculator you can use. Here is the example of results after entering annual income and estimated annual medical costs:
This shows you the differences in your net pay, how much you will save on taxes, a recommended contribution amount, and how much your withholding will be per month if you elect the recommended contribution amount. As you can see in the example, you can pay fewer taxes by contributing to an FSA.
*As a disclaimer, I am not a tax professional and this is a dummy sample. I just want you to get an idea of how an FSA may help you in the long run.*
Tip # 3: Again, save all receipts!
Last, but not least! SAVE YOUR RECEIPTS! I know this is repetitive from above but this is just as important in an FSA, as it is in an HSA. You want to make sure you have an invoice or detailed receipt to show the cost and what you used your FSA funds for. Just like with the HSA, if you need to be reimbursed, you will need the invoice as backup.
I hope you found this information helpful and save this information for future reference. In the comments below, let me know if you have an HSA or FSA and if you learned anything new in this post. Don’t forget also to follow me on Instagram for more tips!