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What’s the difference between an HSA and an FSA? It matters for end-of-year health spending.

You don't have to spend the balance of your health savings account before the end of the year and other differences between HSAs and FSAs.

HSAs can be a valuable resource for people with high-deductible health plans, which can mean spending thousands out of pocket before the plan starts paying.
HSAs can be a valuable resource for people with high-deductible health plans, which can mean spending thousands out of pocket before the plan starts paying.Read moreiStock (custom credit) / Getty Images/iStockphoto

Every December, it can seem that the only break we get from holiday shopping ads is pitches to buy new eyeglasses, so we can use up all our pretax health dollars before the new year and not lose them.

But don’t be deceived — those ads are referring to flexible spending accounts, or FSAs. If you have a health savings account, or HSA, there’s no need to drain the account.

And that’s not the only important distinction.

HSAs can be a valuable resource for people with high-deductible health plans, which can mean spending thousands out of pocket before the plan starts paying. These accounts allow you to set aside pretax money that can be withdrawn tax-free to pay for health-care costs. Yet many people may be leaving money on the table because they don’t understand how exactly these untaxed accounts work and the important ways they differ from flexible spending accounts, which are not tied to high-deductible plans.

The differences can be hard to pick up — some FSA accounts describe themselves as “health spending accounts,” and some health-care providers mistakenly lump HSAs and FSAs together in their “use it or lose it” year-end marketing campaigns.

We asked a panel of employee benefit experts about HSAs:

  1. Paul Fronstin, director of health research, the Employee Benefit Research Institute.

  2. Chris Van Buren, partner, Embrook Benefits Consulting in Willow Grove.

  3. Lauren Stuart, executive vice president, Tycor Benefit Administrators in Berwyn.

  4. Jennifer Calhoun Mohl, partner, Mercer in Philadelphia.

  5. Sander Domaszewicz, senior consultant, Mercer.

What is an HSA?

A health savings account, or HSA, allows you to set aside money, pretax, to spend on medical expenses. Money can be withdrawn tax-free for eligible expenses, such as prescription medications and doctor visits. Individuals can contribute $3,500 a year in 2019 and families can contribute $7,000 a year. Contribution limits will rise to $3,550 for an individual and $7,100 for a family in 2020. People over age 55 can contribute an additional $1,000. There’s no limit to the account’s balance, and balances carry over from one year to the next.

How is an HSA different from an FSA?

Both accounts allow you to set aside money pretax to spend on eligible health expenses. The key differences are that FSAs are established by employers and any money contributed by you or your employer must be used that year, though some accounts allow users to roll over up to $500 or have a grace period to spend money beyond the plan year. FSAs automatically cover an employee’s entire household, and you must set a repeating contribution rate for the year. HSAs have more options: You can change the amount you contribute over the course of the year and can choose to cover an individual or family. In most cases, you cannot be covered by both an FSA and an HSA. That means if your spouse has a FSA through work and you have an HSA, your family may need to choose one or the other. An exception: Limited-use FSAs, which cover only certain services, such as vision and dental, are “HSA-compatible.”

Who can open an HSA?

To open and contribute to an HSA you must be enrolled in a high-deductible health plan, meaning a plan with a deductible of at least $1,350 for an individual or $2,700 for a family in 2019. For 2020, the deductible needed to qualify will increase to $1,400 for an individual and $2,800 for a family. If anyone else can claim you as a dependent on a tax return or you are covered by another form of insurance in addition to a high-deductible health plan, you won’t be eligible.

How do I use an HSA?

HSAs are bank accounts and almost all come with a debit card that can be used to pay for medical services at doctor’s offices or at a pharmacy. Like a standard checking account, you can use an HSA to pay bills online or you can withdraw money to reimburse yourself for expenses covered in cash. Because an HSA can be spent only on eligible health expenses, it is important to keep a record of transactions.

What can I spend HSA money on?

The amount you contribute is based on whether you have single or family coverage, but money in the account can be used to pay for medical expenses for anyone in your family, such as co-pays for doctor visits and prescription medications. HSAs can pay for medical expenses even if they are not covered by your high-deductible health plan, such as orthodontics, dental and eye care, ambulance services, breast pumps, even a service animal. For a full list refer to IRS Publication 502.

What can’t I spend HSA money on?

HSAs can’t be used to pay for over-the-counter medications, nutritional supplements or cosmetic procedures, among other things. When picking up a prescription medication, be careful to pay for any additional items separately. An HSA debit card will make note of which items were HSA-eligible, but it won’t stop you from paying for ineligible items. Funds withdrawn for ineligible expenses are subject to a 20 percent penalty and the personal income tax.

What happens to my HSA if I change health plans or enroll in Medicare?

Once you leave your high-deductible health plan — either for another private health plan or Medicare — you will not be able to contribute to your HSA, but the existing balance is yours to spend on eligible expenses. People who want to work beyond age 65 may choose to enroll in just Medicare Part A (hospital coverage) at no cost and keep their private health plan, and must also stop contributing to their HSA but can continue spending the balance. For Medicare beneficiaries, HSA accounts can be helpful for paying for services not covered by Medicare, such as long-term care. Medicare enrollees can also withdraw money from their HSAs to pay for ineligible products and services without paying the 20 percent penalty, though they will still be subject to the personal income tax. People who enroll in Medicare Part A (hospital coverage) but remain working and covered by a high-deductible health plan as their main health insurance will also need to stop contributing to their HSA, but can continue spending the balance.

How can I get the most out of my HSA?

Consider treating your HSA as an investment account, rather than a spending account. Many HSAs have investment options, though only 5 percent of the 22 million HSA accounts in the United States are invested in stock, according to the Employee Benefit Research Institute. Contribute as much as you can afford — even if you don’t think you’ll spend that much on health care in a year. Any balance beyond what you think you’ll spend on health care in a year can be invested and earn interest until you need it, though check first what fees are charged for investing. This approach could be especially beneficial for people worried about having saved enough for retirement, because health care is one of our biggest expenses in old age.