Healthcare is a major burden for Americans of all ages. Thankfully, there are special accounts that allow you to pay for healthcare in a tax-advantaged fashion. Two popular choices in this regard are flexible spending accounts (FSAs) and health savings accounts (HSAs). But while some might confuse the two, they're actually very different.
How flexible spending accounts work
A flexible spending account lets you allocate pre-tax funds from your earnings to pay for healthcare expenses like doctor visit copays, prescriptions, and medical supplies. The maximum amount you're allowed to put into an FSA changes from year to year, but in 2019, it's $2,700. Contribute the max, and that's $2,700 of earnings the IRS can't tax you on.
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That said, you need to be careful when funding an FSA, because if you don't deplete your account balance by the time your plan year ends, you'll risk forfeiting your remaining funds. But there are no major requirements that dictate eligibility -- if you have an employer that offers an FSA, you can generally opt to participate as you wish.
How health savings accounts work
Health savings accounts are similar to FSAs in that the money you contribute goes in on a pre-tax basis and can be used to pay for qualified medical expenses. But whereas anyone with access to an FSA can usually participate, HSA eligibility is stricter. To qualify for an HSA, you must be on a high-deductible health plan, which is currently defined as a deductible of $1,350 or more for individual coverage, or $2,700 or more for family coverage. Your annual out-of-pocket maximum also needs to be $6,750 as an individual, or $13,500 as a family. As such, many would-be participants are excluded from HSAs.
The annual contribution limits for HSAs are much higher than those of FSAs: $3,500 at the individual level, or $7,000 at the family level. Those who are 55 and older can also contribute $1,000 on top of whichever level they qualify for.
But it's not just contribution maximums that mark the difference between FSAs and HSAs; HSAs also offer a lot more flexibility with your money. That's because you don't have to use up your account balance on a year-to-year basis. In fact, one major benefit of HSAs lies in the fact that you're allowed to invest funds you're not using immediately and grow your account balance into a larger sum so that you have money available for healthcare expenses down the line, whether later on in your career or during retirement.
Furthermore, whereas investment gains in regular brokerage accounts are subject to capital gains taxes, the money you invest in your HSA gets to grow tax-free, and withdrawals are tax-free as well, provided you use those funds for qualified medical expenses. If not, there are taxes and potential penalties involved.
Can I have an FSA and an HSA at the same time?
Because FSAs and HSAs offer similar tax benefits, you're generally not allowed to contribute to both simultaneously. However, there are some exceptions. If your employer offers a limited-purpose FSA, you can fund it alongside an HSA. A limited-purpose FSA allows you to spend money on qualified dental and vision expenses. Under this setup, you can use your FSA for things like cavity fillings and eyeglasses, and then use your HSA to pay for medical costs like doctor visits and prescription drugs.
Another option that lets you fund both an FSA and HSA simultaneously is the post-deductible FSA, which is also limited to dental and vision expenses until your minimum deductible for HSA purposes is met ($1,350 as an individual and $2,700 as a family). Once that happens, you can use your FSA for all qualified medical purposes. What you can't do, however, is get reimbursed for the same medical expense through your HSA and your FSA.
Make your healthcare costs more affordable
Whether you're eligible for an FSA, HSA, or even both, it pays to take advantage of these accounts. By allocating pre-tax dollars to pay for healthcare, you can lower your IRS burden and reap major savings. And that's a perk you don't want to pass up.
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