What is the Difference Between HSA and FSA Accounts?

by Kevin on September 27, 2010

My wife and I both work and our employers offer different health insurance plans. In fact our employer offered insurance plans couldn’t be more different.

Her employer offers a “traditional” health insurance PPO plan with a decent monthly premium (in the $100 to $150 range for family coverage) and a $30 copay. She also has the option of using a Flexible Spending Account.

On the other end of the spectrum my employer offers a high deductible health plan (HDHP) that is teamed up with a Health Savings Account. My employee plus one dependent deductible is $2,400 annually with copays kicking in after that. The cost is about $200 per month. And note that isn’t even full family coverage! It only covers me and one dependent (spouse or child). If there were three of us the cost jumps up to over $300 per month.

With the HDHP my employer kicks in a bit of money to help kickstart your HSA savings to offset that enormous deductible, but it isn’t the whole deductible.

As you might expect we use my wife’s coverage because it is so much better than my employer’s coverage. I thought I’d use my own story to explain the differences between FSAs (that my wife’s employer offers) and HSAs (that my employer offers).

What is a Health Savings Account (HSA)?

A health savings account is a contribution account that is funded to pay for healthcare expenses. It is tied to a specific type of health insurance plan called a high deductible health plan.

HSAs can be funded by either the employee or employer throughout the year. A key benefit for the employee is the contributions are tax deductible. It’s kind of like a 401k. You put money into the HSA and you get a break on your taxes this year.

Unlike a 401k as long as you use the HSA funds for eligible medical expenses you won’t pay taxes on the money. That means you’ve gotten a tax deduction and have never had to pay taxes on the contribution.

Another set of perks of HSAs is the employee owns the account and can hold onto the funds forever. You don’t have to use the funds by the end of the year.

What is a Flexible Spending Account (FSA)?

FSAs are very similar to HSAs in that they are contributions accounted that are funded to pay for healthcare expenses. The FSA is tied to a health insurance plan like a PPO. Contributions are tax deductible just like HSAs.

In fact other than the types of insurance the FSA is tied to the accounts are nearly identical in use.

Except for one thing…

Key Difference Between HSAs and FSAs

The primary difference between the two accounts is how long you can hold on to the money inside the account.

Health Savings Account funds can be held on until retirement if you choose.

Flexible Spending Accounts are a “use it or lose it” account. That means you have to use the funds inside the FSA before the end of the plan coverage period (usually the end of the year). If you set aside $1,000 during the year (woohoo $250 tax break!) and only spent $700 of that money you will lose $300 at the end of the year.

How will you lose it? Pretty simple. You forfeit the unused funds. Where do they go? Either to the plan for “administrative costs” (wink wink, thanks for the new furniture in the executive offices) or gets doled out to plan participants as income.

Yea, you don’t want that. So make sure that if you’re using the FSA that you end up using every last cent of the funds before you lose them.

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{ 21 comments… read them below or add one }

John September 29, 2010 at 11:44 am

I would LOVE to have premiums that cheap! For my county coverage, $2,500.00 deductible, 80/20 the next $5000.00 for me only. I pay $458 per month, and is an HSA; family coverage premium (no matter how many) is almost $1,000.00 per month. Better coverage is obviously more expensive. For me, the “Obamacare” is really a matter of $$$. If I can get as good or better coverage for a tax of less than about 12% of my gross salary, I am saving money.

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Kevin September 29, 2010 at 1:00 pm

Zoinks. Thanks for the alternative perspective. That’s definitely rough! What state are you in?

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Chris Gagner & SmartPF.com October 17, 2010 at 4:12 pm

I prefer HSAs over FSAs. I would recommend the HSA if you’re healthy and you’ve got an emergency fund. The big thing that I’ve never liked about the FSA is the “use it or lose it” rule. My HR department tried to sell this very well, saying that, “It would give you a perfect opportunity to stock up on over the counter medicines at the end of the year.”

All that sounds like to me is a good reason to spend money on things that I don’t need. I’ll stick with the HSA.

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Hugh January 28, 2011 at 5:58 pm

I have done the end-of-the-year shopping spree on OTC drugs, it worked out quite well.

As of January 15, 2010 you can’t use FSA (or HSA) for OTC products without a prescription. I hope everyone read that fine print when they chose their FSA allocation.

I switched from PPO to HDHP this year, so I opted to have a FSA and HSA as I didn’t want to wait for the HSA balance to accumulate

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Alan November 12, 2010 at 12:42 pm

All of the above makes my co-op arrangement look so good. Alan

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Elizabeth January 10, 2011 at 9:20 am

Hypothetical scenerio with a FSA… What happens if you end up using all of the allocated funds that you were advanced but end up resigning from your employer before repaying all of the money back through your payroll deductions?

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Joel January 18, 2011 at 7:32 pm

Your company assumes the responsibility when offering the FSA plan. So if you use up all the funds before the end of the year, and decide to leave the company, then the money comes out of their pocket.

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Eric June 26, 2012 at 11:33 am

But be careful. In my case, my company shut down my FSA debit card on my last day of employment. I can still get reimbursed for any expenses incurrend BEFORE I quit but not after.

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Upload Pictures July 14, 2011 at 6:45 am

not a good company to get in then

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Dr. Jeff November 3, 2011 at 10:19 pm

Great article, I am going to tell my patients to come here to find out the differences in these accounts next time. You explain it better than I can anyway.

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Christian December 12, 2011 at 3:30 pm

An FSA is not technically a tax-deduction: you can’t list it on your 1040 as a deductible expense. However, even better, it comes from pre-tax money and so like a tax credit.

With an FSA You nominate a fixed amount per pay check that will go into the FSA up to an annual maximum. That money is then taken out of your GROSS pay-check – i.e. before tax – in installments over the year.

Therefore, the FSA actually reduces your the taxable portion of your income. According to Wikipedia, it is actually a reduction in the payroll tax.

Depending on your salary and tax situation, the benefits can be substantial.

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Brian January 16, 2012 at 4:21 pm

One thing this article does not mention (or I missed) which is another key differentiating point for HSA and FSA. With an FSA, you may deduct up to $5000 (IRS limit) for Dependant Care costs. This includes things like day care, babysitter/au pair services, non-educational summer camps, caring for an elderly parents, etc. This option is not available with an HSA, which strictly covers medical expenses.

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AJ January 31, 2012 at 5:22 pm

One BIG

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AJ January 31, 2012 at 5:25 pm

Ok…I’ll try again…one BIG benefit of FSA is that after you have committed to a certain contribution (say, $2,000) and then decide to leave the company, whatever $ you have not spent of the $2,000 is yours to spend within a certain amount of time (I think mine was 1 month). So that is free $ to you because it has not yet been deducted from your monthly paychecks….at least that’s the way it was where I worked.

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Stacy April 11, 2012 at 2:06 pm

Hi — I have a question that has been impossible to find an answer to, anywhere I’ve looked, it seems. Perhaps someone here knows. I need to file taxes for 2010 and 2011. My DH was laid off, suddenly, in ’10. To add insult to injury, the way it happened, we ended up losing nearly $500 in one of these FSA accounts (NEVER AGAIN!!!!!). I am trying to find out if a portion of this amount, offset by the supposed tax savings we got, can be deducted from our taxes as a loss. We definitely lost out by having this dumb account. :( Thanks!!!

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Christian April 11, 2012 at 2:15 pm

Hi Stacy,

I don’t think you can, but I’m no tax expert by far. You might be able to find an answer to this at turbotax.com.

Even if you don’t pay for TurboTax, once you register you get access to their huge community of people asking tax questions and tax pros answering them for free. I’ve had a lot of my questions answered that way.

Good luck!

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Stacy April 11, 2012 at 6:36 pm

Thanks so much, Christian. I will check it out. :)
It’s kind of odd that an answer to this question is so tough to find out. Especially since, from what I am reading/seeing while researching this topic, so many people are in the same boat I am.
Have a good evening and thanks again!

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JS March 15, 2013 at 10:24 am

You should have been offered COBRA for your FSA account. You could then pay the 2% COBRA fee, have your FSA available to you for a month or two so you can spend the rest of the money that you have contributed.

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Gruntledlark May 7, 2013 at 8:45 am

my understanding is that the total amount of an FSA election is available to you on day 1 of your plan. IOW, If you elect $1200 FSA, $100 is deducted from your pay every month to fund it, but you can spend that $1200 on the first day of your plan coverage before your first paycheck deduction is taken. If you get laid off before the end of the plan year you are not on the hook for the remainder of the funding. The only caveat is that your medical expense must have occurred while you were still covered under the plan. So, yeah, it’s use it or lose it, but if you plan some things out, you can ensure to have some things covered and payed for near the beginning of a plan year, even if you lose your job before the end of the year.

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debra jenson May 8, 2013 at 10:52 pm

I am 58 with some health issues. I switched to hsa, because i lost money. But of cousre, ended in the hosp. in febr. I hadn’t realized some of my med’s were so expensive, so here i sit, waiting for money to go into the account for meds., dr, hosp will have to wait. lots of FUN? Nope! if no-one noticed, i hate to type, forgive me please. although meds are considered part of out -ot-pocket, it doesn’t help when they are less costly with a 3 month at 303.00. thanks for letting “vent”. P.S. I make 13.66 an hour about 46% goes to taxes, ins. and 6% is retirement.

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shelley December 12, 2013 at 9:28 am

My question is this…
I have a patient who paid part of their dental bill with a HSA and part of their bill with a FSA. Insurance did come through and paid more than we expected; leaving a credit on the account.
The patient does have more dental work that he will be completing in 2013. Is it ok to use this credit towards his dental work next week, or for paperwork purposes, do I need to refund this credit on his account just to turn around to then debit the same card in 6 days?
I know some companies are extremely strict that every cent must match perfectly for the procedures that are performed and some in it as long as it is within the year. Is this a case by case situation?
Thanks, all!

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