For some employees, the deadline for using the money in your flexible savings account (FSA) has passed. While some plans require that you use your funds by the end of the calendar year, some plans give you until March 15 of the following year to spend the money. So, for those with the March deadline, your chance to spend FSA dollars for the previous year – or lose them – has already passed. One of the reasons that employees leave an average $86 (according to Kiplinger) in their FSAs could be that they aren’t fully aware that this money doesn’t roll over like health savings account (HSA) contributions do.
Keep Your Funds: Biggest Difference Between a FSA and a HSA
Like the flexible spending account, a health savings account features tax-deductible contributions. You set aside pre-tax money for health care expenses, tapping your account when you need to spend money on qualified costs. As long as you use your money for qualified health care expenses, you don’t have to pay taxes on your contributions (and your earnings in the case of a HSA, which operates like an IRA).
Rules for what constitutes a qualified health care expense are similar for FSAs and HSAs, including the new rules that require you to have a prescription for over the counter medicines that you want to pay for using health account funds. There are some differences between the two accounts, though. The biggest difference between the FSA and the HSA is that you can roll your money over year to year with a HSA.
A flexible spending account requires that you use the money you set aside each year – or lose it. If you don’t spend it all, it is lost. With a health savings account, though, the story is different. The money rolls over, so it accumulates year after year. In the end, as long as you meet the rules for withdrawing from an IRA, you can even take distributions for non-medical costs (you will have to pay taxes, though).
Other Differences Between HSAs and FSAs
Qualifying for a HSA is a little different from qualifying for a FSA. You must be paying for a high deductible health insurance plan if you want to set money aside in a HSA. This means you might have higher out of pocket expenses – but a lower insurance premium. With the flexible spending account, it might just be part of your employer’s health plan. You don’t even need a health plan to participate in a FSA.
Additionally, with a FSA, you can actually use the money to pay for dependent care expenses, such as childcare or elder care. This is not possible with a HSA. In some ways, as long as you know that you can use the money in your FSA, the flexible spending account is more versatile than the health savings account. You should also be aware that if you have a chronic condition or spend a great deal on health care, a HSA might not be the best choice since you will be paying more out of pocket.
Choosing between the two is largely a matter of your personal finance situation, and your preference. Before deciding, though, you should understand the main differences between the two so that you know what will work best for you.