Which is Better: an FSA or HSA?

A common question people ask at enrollment meetings is Which is better: an FSA or HSA? The answer to this question is not as simple as it seems. The two accounts are very similar, but they have some major differences.

Which is Better: an FSA or HSA?

First, let’s take a look at how the accounts are the same.

With both a Flexible Spending Account (FSA) and a Health Savings Account (HSA), you set aside money before taxes to cover out-of-pocket healthcare expenses. In addition, the eligible medical expenses for each account, which includes dental and vision, are nearly identical. Learn more about eligible expenses.

Now let’s find out how they differ.

Health Insurance Plan Requirements

To sign up for an HSA, you must be enrolled in a qualified high deductible health plan (HDHP). You must also be enrolled in an HDHP in order to make contributions to your HSA. With an FSA, there is NO health plan requirement; every employee is eligible.

Contribution Limits

HSA contribution limits for 2019 are $3,500 for individual coverage and $7,000 for those with family coverage. In 2018, it was $3,450 (individual) and $6,900 (family). For FSAs, the limits are currently set at $2,700, regardless of status.

If you have an HSA, you can change your contribution amount at any time during the year. With an FSA, you cannot change the contribution amount once the plan year begins (with exceptions for certain qualifying events).

Carryover, Grace Periods, and Use it or Lose It

Whether or not you get to keep some of your unused FSA money depends on your company’s plan setup. Your FSA plan will have one of the following:

  • $500 Carryover: Unused funds in your account, up to a $500 maximum, carry over to the following year;
  • Grace period: You have 2.5 months in the new plan year to use the remaining funds in your FSA from the previous year;
  • Use it or Lose it: Any unused money in your FSA at the end of the plan year is lost.

With an HSA, account owners have rollover. They get to keep all remaining money in their account from one plan year to the next.

Claims Reimbursement

For both FSAs and HSAs, you submit claims or use a debit card for reimbursement. However, with an FSA, you can only submit claims and get reimbursed within the same plan year. In other words, for an expense in March 2018, you need to submit your claim before the end of the 2018 plan year (generally on or before December 31).

With an HSA, it’s much different. You can claim any eligible expense at any time after the HSA is established. If your HSA started in January 2015, and you had an expense in February 2015, you could submit a claim any time after February 2015 – even in October 2017 (or later) – and get reimbursed as long as there are sufficient funds in your account.

Funds Availability

With an FSA, your full contribution amount is available on day one of the plan year. If you claim your total contributions early in the year, you will still see the automatic deductions (divided equally) from your paycheck each pay period.

HSA owners can only use the money that is currently in their account. If the balance is $200, but they have a $500 bill, they can only use $200 (or wait until the balance builds up).

Interest and Investing

As stated earlier, contributions to both FSAs and HSAs are pre-tax. However, HSA owners also earn tax-free interest on the balance and the can invest their account dollars which earn tax-free dividends. FSAs do not earn interest or dividends.

  FSA HSA
Health Insurance Plan Requirements None Qualified HDHP to open an account or make contributions
Annual Contribution Limits $2,700 regardless of insurance or family status

2019: $3,500 with Individual coverage, $7,000 family

Unspent Funds at End of Plan Year
  • FSA Carryover, roll over up to $500
  • Grace Period, get extra 2.5 months to spend balance
  • Use It or Lose It, meaning unspent funds are lost
100% rollover to next plan year, regardless of amount
Claims Reimbursement Account funds can only be used to reimburse expenses incurred during same plan year (except during Grace Period, if applicable) Account funds can be used to reimburse expenses incurred at any time after account opened, even years later
Funds Availability Full amount of annual election is available to spend from first day of plan year Can only spend actual account balance regardless of annual contribution amount
Interest and Investing No interest and no ability to invest Earn interest on the balance, funds can be invested

These are the major differences between FSAs and HSAs. Which is better: an FSA or HSA?, ultimately depends on both your health plan coverage and medical needs.