Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are both types of accounts that offer tax advantages for individuals to save and pay for qualified medical expenses. While they share similarities, they also have distinct differences. Here’s an overview of each:
- Flexible Spending Account (FSA):
- An FSA is an employer-sponsored benefit account that allows employees to set aside a portion of their pre-tax salary to pay for eligible medical expenses.
- Funds contributed to an FSA are not subject to income tax, Social Security tax, or Medicare tax.
- FSA funds can be used for qualified medical expenses not covered by insurance, such as co-payments, deductibles, prescription medications, and certain over-the-counter items.
- The contribution limit for FSAs is determined by the employer, but it cannot exceed the limit set by the IRS. As of 2022, the maximum contribution limit for healthcare FSAs is $2,850 per year.
- One drawback of FSAs is the “use-it-or-lose-it” rule, which means that funds contributed to an FSA must be used by the end of the plan year or forfeited, although some plans offer a grace period or a carryover option.
2.Health Savings Account (HSA):
- An HSA is a tax-advantaged savings account available to individuals who are enrolled in a high-deductible health plan (HDHP).
- Contributions to an HSA are tax-deductible, meaning they reduce the individual’s taxable income for the year.
- HSA funds can be used to pay for qualified medical expenses, including deductibles, copayments, prescriptions, and certain other medical expenses not covered by insurance.
- Unlike FSAs, funds in an HSA roll over from year to year and accumulate over time, allowing individuals to build savings for future medical expenses.
Both FSAs and HSAs offer valuable tax benefits for managing healthcare costs, but the choice between them depends on factors such as eligibility, plan features, and individual financial circumstances. It’s essential for individuals to carefully evaluate their options and consider consulting with a financial advisor or benefits specialist to determine the best strategy for their healthcare needs.