What’s the Difference Between an HSA and an FSA?

There’s no shortage of acronyms in the health insurance industry, and it’s hard to keep them all straight. You’ve probably heard of HSAs and FSAs before, but may not know what they actually entail. What’s the difference between HSA and FSA?

Another important question you should ask yourself as an employer is, “Is this something I should offer my team?” Here, we’ll dive into some facts about eligibility, contribution limits, and overall benefits and drawbacks of HSAs and FSAs so you can begin to find the best answer for your business.

What is a Flexible Savings Account?

A Flexible Savings Account, or FSA, is an employer-owned account that allows eligible employees to save pre-tax money to pay for out-of-pocket healthcare costs.  It is also often referred to as a Healthcare FSA. Employees select the amount they want to put into the account for the calendar year, and money is added to the account each month through pre-tax contributions from the employee.

The entire amount the employee elects to save and contribute is immediately available for use once the account is open for the year. In other words, the account does not need to be fully funded for the employee to use the full amount of funds.

FSAs have annual limits on how much a person can contribute to the account. In 2023, for example, the limit will be $3,050. The IRS typically modifies these limits every year to account for the cost of living. It’s also important to note that self-employed workers aren’t eligible for FSAs.

Biggest Benefits of an FSA:

• Can be used for deductibles, copays, medication, and other healthcare-related out-of-pocket costs.

• All money deposited is untaxed.

• Most FSA accounts come with a debit card.

• Employees can spend the money in the account before it’s fully funded.

Drawbacks of FSAs:

• Funds do not carry over year to year, unless the FSA specifically allows for it, and even then the amount that can be carried over is limited. For this reason, the FSA has an element of "use it or lose it" for employees.

• However, this is a potential benefit for employers, who can keep the money for their company if it goes unused, but there are limitations to how these funds can be used by the employer.

What is an HSA?

A Health Savings Account, or HSA, is an employee-owned account used to save pre-tax dollars for health costs. It’s nonforfeitable and portable.

Because they are employee-owned accounts, HSAs offer a greater deal of flexibility than FSAs. HSAs can be used to make investments, similar to a 401(k) and an IRA. These funds then grow in that person's account completely tax free.

To be eligible for an HSA, employees must be enrolled in a high deductible health plan (HDHP) that is HSA compatible. In other words, as an employer, you must offer your team access to an HDHP in order for them to be able to open an HSA.

There are additional eligibility requirements for HSAs. Employees can’t be enrolled in health coverage other than an HDHP. General purpose health FSA or HRA coverage can prevent eligibility for an HSA. In addition, employees cannot be enrolled in Medicare Part A, B, C, or D, and they cannot be claimed as a dependent on any other person’s tax form.

Like FSAs, HSAs also have annual contribution limits. In 2023 individuals can put away up to $3,850 in their HSA, and families can contribute a max of $7,750.

Biggest Benefits of an HSA:

• Withdrawals from an HSA are not subject to federal (or in most cases, state) income taxes if they are used for qualified medical expenses.

• Contributions can come from various sources, including the employee, employer, a relative, or anyone else who wants to add to your HSA.

• Account holders over 55 years old can make an additional catch-up contribution of $1,000 in 2023, tax-deductible.

• HSAs can be used to make investments, similar to a 401(k) and an IRA. These funds then grow in that person's account completely tax-free.

• After an employee turns 65, they can begin to use the HSA for Medicare premiums.

• The funds carry over from year to year.

Drawbacks of an HSA:

• If an employee withdraws funds for non-qualified expenses before they turn 65, they’ll owe taxes on the money plus a 20% penalty. After age 65, they’ll owe taxes but distributions will be penalty free.

• High-deductible plans can feel expensive when employees are paying large deductibles out of pocket.

HSA vs FSA: Quick Comparison

Let's break it down into a bite-sized summary:

• Both FSAs and HSAs allow eligible employees to save pre-tax money to pay for out-of-pocket healthcare costs. 

• An FSA is an employer-owned account, while an HSA is an employee-owned account.

• FSA funds do not carry over from year to year, while HSA funds do.

• HSAs have more eligibility requirements than FSAs, including that employees must be enrolled in a high deductible health plan (HDHP) that's HSA compatible.

• Both FSAs and HSAs have annual contribution limits.

Justworks Can Help

If you’re weighing offering an HSA or FSA to your employees, Justworks may be able to help. We offer both HSA and FSA when you access health coverage for your team through Justworks. Learn more about our benefits offerings here.