HSA and FSA Cards- Background on HSA/FSA Cards
Healthcare takes a huge chunk of every family’s monthly budget. That’s because the price of health care services and insurance premiums seem to increase every year. And with the sharply rising costs in healthcare, there have been changes in how individuals are asked to allocate their healthcare budget.
The Health Reimbursement Accounts (HRAs) were created to offset rising healthcare costs. On the other hand, Flexible Spending Accounts (FSAs) were made to help combat the drawbacks of HRAs. Part of the 1978 tax legislation was that FSAs would come in handy since employees couldn’t contribute to their HRAs.
The arrangements were swiftly added to different pre-tax employee benefits choices. Later in 2003, HSAs-Health Savings Accounts were established. They helped individuals covered by high-deductible health plans; HDHPs get tax-excluded treatment with pre-tax dollars. Generally, this helped reduce medical costs.
What is a Health Savings Account (HSA)?
An employer usually offers a Health Savings Account alongside a high-deductible health plan (HDHP). However, if you are self-employed, you can also set up your individual high-deductible plan. You are only eligible for an HSA if you have a qualifying HDHP.
In an HSA, a portion or all of the deductible amount is deposited in an HSA account to cover costs until the tax-deductible is met or the health insurance policy takes on the financial burden. After setting up your HSA, you can contribute additional money to it via a payroll deduction from the gross income.
Since money contributed to the HSA account comes from pre-tax dollars, it significantly reduces the amount filed for tax purposes. What’s more, the interests or earnings on your HSA card are also tax-free.
What is a Flexible Spending Account (FSA)?
On the other hand, the FSA is much like an HSA, only that it’s not allowed for self-employed individuals. A significant benefit that people realize with FSAs is that you can set up a Dependent Care FSA. This will enable you to make withdrawals for childcare expenses. Also, depending on your company’s plan, you could have a regular FSA on the side to cover medical costs.
Notably, with FSAs, you can contribute with your gross pay. That makes contributions to your account tax-free. And as long as you use the money for qualified medical expenses, you won’t owe any taxes, even on withdrawal.
What are the Key Differences between HSA and FSA Cards?
FSAs are only offered by employers, while HSAs can either be provided by an employer or opened by an individual. And while anyone whose company can contribute to an FSA, when it comes to HSAs, you must have a qualifying HDHP.
ii. Tax Rules
Both HSA and FSAs allow you to make contributions with pre-tax dollars; the accounts have different tax purposes. The accounts have different contribution limits; HSAs can allow catch-up contributions for people over 55 years, while FSAs don’t.
The money you contribute to your HSA account can be put into an account with a financial institution. You can then invest the HSA money to grow your funds. Unfortunately, you can’t do the same with FSA funds.
iv. Use of Funds
Money on your HSA card can only be used for healthcare expenses only. On the other hand, FSAs are available in different forms; health care and dependent care FSAs. Dependent care FSA money can be used to pay for adult or child care expenses.
v. Account Ownership
An HSA solely belongs to you. That means, in case you leave your job, you can take the HAS with you. The case is different for FSAs as you forfeit it as soon as you leave your job. The only exceptions are if you are eligible for an FSA COBRA continuation coverage.
vi. Carryover Rules
The funds in your FSA card must be spent within the same year you make contributions. In some cases, you can carry over funds from your current year FSA into the next without affecting your contribution limit. Another option would be using the funds during the end-year grace period.
All the same, keep in mind that not all FSAs have this option. On the other hand, you don’t have to withdraw funds contributed to your HSA. You can leave them invested and allow them to grow for as long as possible.
Funds in your FSA card can only be used to cover medical expenses. On the other hand, funds in your HSA account can be withdrawn at any time. However, if you make your withdrawals before age 65, you will be subject to a 20% penalty and income taxes if the money doesn’t go to cover medical expenses. If you’re over 65, you can withdraw the funds for any purpose and will only pay taxes at your usual income tax rate.
Undoubtedly, HSAs are a better choice for most people as they offer more flexibility. But if you don’t have a qualifying HDHP and don’t meet eligibility requirements for HSAs, an FSA is the only best option for paying your medical expenses with pre-tax dollars. With an FSA, however, keep an eye on your account so that your accrued funds don’t expire at the end of the year.