How Does an FSA Differ From an HSA?

There’s just one letter different in the name of a Flexible Spending Account (FSA) vs. a Health Savings Account (HSA), but there are a number of differences in how they work and what they can be used for. Most people are familiar with a health care FSA, but there are a couple of other types of FSAs, which are explained later.

What is an FSA?

An FSA is a type of savings account that allows employees to contribute a portion of their earnings to pay for qualified health care expenses. An FSA can be used to pay yourself back for eligible health care, vision, and dental expenses for yourself, your spouse or eligible dependents. Money contributed to the account is deducted from your paycheck and is not subject to income or payroll taxes.  

The 2022 contribution limit is $2,850. So, for example, someone earning $60,000 that elects to set aside the full contribution would only be taxed on $57,150, saving more than $600 in federal income taxes. 

With an FSA, the money comes out of your paycheck, before taxes, in regular increments. However, these accounts are typically “pre-funded” by the employer, meaning the full contribution amount is available to spend at the beginning of the year. One caveat: If you leave your job in the middle of the year, you may have to pay back money that has been spent but has not yet come out of your paycheck. 

Unlike a Health Savings Account, an FSA does not have to be used with a High Deductible Health Plan. Also unlike an HSA, an FSA is owned by the employer, and you forfeit any unused balance unless the employer allows a carryover, which is capped at $570 for 2022. 

FSAs follow the same rules of your health plan. In other words, you can only enroll in an FSA as either a new hire, during the open enrollment period, or if there is a qualified event (marriage, divorce or birth of a child, to name a few). 

All benefit-eligible employees may enroll in an FSA, even if they are not enrolled in a group medical plan.  

A comprehensive list of what’s eligible can be found at the FSA Store.  

Note: If you qualify for an HSA, you cannot also set up an FSA, except in the case of a “limited purpose FSA.” This works like a regular FSA but can only be used for vision and dental expenses. 

Key takeaways: 

• Funds contributed to an FSA are deducted from your earnings and are not subject to income and payroll taxes.
  
• Funds withdrawn from an FSA to pay for qualified medical expenses are not subject to tax. 
  
• FSAs are often referred to as a “use-it-or-lose it” benefit. However, an employer may offer a grace period until March 15 of the following year.
  
• An FSA does not have to be used with a qualified High Deductible Health Plan, unlike an HSA.

Other FSA options  

Other popular types of FSAs include: 

• Dependent Care FSA (DCFSA), a pre-tax benefit account used to pay for eligible dependent care services, such as preschool, summer day camp, before- or after-school programs, and child or adult daycare.
  
• Commuter FSA, which can be used to reimburse parking and transportation expenses, including Uber and Lyft.

If you have an HSA, you cannot also have a health care FSA, but you are permitted to have a DCFSA and/or a Commuter FSA.   

More resources: 

Amazon FSA Store  

Amazon: What is FSA/HSA Eligible?  

Related:

What is an HSA?

Which Spending Accounts Can I Use Together?

Comparison Chart

We know this is a lot to take in. If you’re still wondering which option would be the best fit for you, we’d be happy to give you more information. Give us a ring!