What is the difference between a flexible spending account and a health savings account

 

AspectFlexible Spending Account (FSA)Health Savings Account (HSA)
Tax AdvantagesContributions are made with pre-tax dollars, reducing taxable income for the year in which contributions are made.Contributions are tax-deductible, and qualified withdrawals for medical expenses are tax-free. Earnings can grow tax-free if used for eligible medical expenses.
Ownership and PortabilityTypically owned by the employer, and funds may not be portable if the individual changes employers.Owned by the individual, providing portability even if changing employers. The account stays with the individual.
Eligibility RequirementsAvailable to employees through employer-sponsored benefit plans.Available to individuals covered by a high-deductible health plan (HDHP) and not enrolled in other health coverage, including Medicare.
Contribution LimitsContributions are subject to annual limits set by the IRS. For 2022, the limit is $2,850 for health FSAs.Contributions are subject to annual limits set by the IRS. For 2022, the limit is $3,650 for individuals and $7,300 for families. Additional catch-up contributions are allowed for individuals 55 and older.
Rollover of FundsGenerally, up to $550 of unused funds may be carried over to the following plan year or allowed for a grace period.Funds can roll over from year to year, and there is no "use-it-or-lose-it" rule. The balance can continue to grow and accumulate.
Withdrawal for Non-Medical ExpensesFunds can only be withdrawn for eligible medical expenses. Non-qualified withdrawals may be subject to income tax and an additional penalty.Withdrawals for non-medical expenses before age 65 may incur income tax and a 20% penalty. After age 65, non-medical withdrawals are subject to income tax but not the penalty.
Investment OptionsTypically, funds are held in an account managed by the employer, and investment options may be limited.HSAs often provide investment options, allowing individuals to invest their contributions in a range of financial instruments, such as mutual funds.
Account AccessAccess to the funds is available from the start of the plan year, even if the full annual contribution amount has not been contributed.Access to funds is generally limited to the amount contributed to the account at any given time. Contributions must be made before funds can be accessed.
Employer ContributionsEmployers may contribute to employees' FSAs, but it is not mandatory.Employers, employees, or both can contribute to an individual's HSA. Employer contributions are often used to incentivize employees to choose high-deductible health plans.
Use During RetirementFunds are generally not available for use in retirement.Can be used for qualified medical expenses during retirement, serving as a supplemental source of income for healthcare costs.
Account ClosureFSAs typically close at the end of the plan year, and any unused funds beyond the allowed carryover or grace period are forfeited.HSAs remain open and continue to exist even if the individual changes employers or retires. The funds belong to the account holder.

In summary, both Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) offer tax advantages for qualified medical expenses, but they differ in ownership, portability, eligibility, contribution limits, rollover rules, investment options, and use during retirement. FSAs are typically employer-owned and may have more restrictions on fund rollover, while HSAs are individually owned, portable, and can serve as a long-term savings vehicle for healthcare expenses in retirement.

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