What’s the difference between a flexible spending account and health savings account?

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Asked November 10, 2014

1 Answer

There are a couple of ways that you can plan for future expenses yourself instead of relying on insurance to cover the costs for you. One of those is a Health Savings Account, referred to as an HSA, and the other is a Flexible Spending Account, or FSA. These two types of financial accounts are similar but have different specifications on how they are used.

A Health Savings Account is specially designed to allow you to put money aside to cover your future healthcare expenses. Money deposited into the account earns interest over time, and there are tax benefits available when it is used for purposes related to better health or medical care. The drawback is that withdrawals used for purposes not related to healthcare are heavily taxed. HSA funds do not have to be spent within an allotted amount of time, but there may be maximum limits on how much you can put into the account.

A Flexible Spending Account is similar to a HSA. Note, however, that an HSA is a type of savings account, while an FSA is a spending account. The primary difference between the two is that you must use the money in you FSA during the year in which the money is deposited while and HSA allows you to use the money as it is needed, even across year-end boundaries.

Another difference between HSA and FSA accounts is that your HSA is limited to non-taxable use for medically related purposes. FSA money can be used on any qualifying purpose, including health care or childcare. The IRS determines what is considered a qualifying event, and provides a list of what is qualified. Since the details vary over time, you should contact the IRS or a financial advisor to find out how the account can be used in any given year.

It is important to remember that the money in an FSA must be used in the same year that is added to the account. Any portion of the money that you do not use in the same year is effectively lost and cannot be reclaimed. With an HSA, you can use the money anytime throughout your lifetime. On the other hand, a FSA does not have the same contribution limits as an HSA. Choosing which type of account is best for your needs can be a difficult choice, and may require the assistance of a financial advisor or other professional.

Answered November 10, 2014 by Anonymous

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