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FSA vs HSA: What’s the Difference?

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With the Affordable Care Act dominating the headlines these days, it seems like healthcare costs are on everyone’s minds. This is understandable – aside from all the legal hubbub, healthcare is a major expense for American families and many of us are doing our best to keep costs down.

One way that many employers try to ease the burden of healthcare expenses is by offering Flexible Spending Accounts (FSA) or Healthcare Savings Accounts (HSA) to their workers. These accounts allow employees to use pre-tax dollars to save for costs related to healthcare. For most of us, this is a win-win: we’re able to lower our taxable income while at the same time putting money aside in the event that we need it to pay for a dental exam or hospital visit.

However, there’s a lot of confusion out there about the difference between an FSA and an HSA, and distinguishing between them is essential for making smart choices regarding your plan for paying for healthcare. If you’re not quite sure what’s what with these tax-deferred plans, take a look at the information below:

Flexible Spending Accounts

FSAs are typically offered as a supplemental benefit to employees that have “typical” health insurance plans – in other words, you don’t have to have a particular type of insurance policy to qualify for an FSA (see below for how this differs with an HSA). This means that FSAs are available to a wide range of people.

If your employer offers an FSA and you elect to participate, money will be siphoned off of your paycheck before it’s taxed and put into the account. This means you’ll be able to avoid paying taxes on it. However, there’s a limit to how much you can contribute in a year - $2,500 to be exact.

Another very important thing to keep in mind about FSAs is that only a limited amount of money - $500 - can be transferred from year to year if you don’t use it. Therefore, you have to think very carefully before deciding how much to contribute.

Health Savings Accounts

Unlike FSAs, HSAs are only available to people with high-deductible health insurance plans. Only individuals with a deductible of $1,250 or higher can open an HSA. However, you’re allowed to contribute more to an HSA than an FSA. The limit for individuals is $3,300 per year, which is pretty substantial. And since saving in an HSA is also done with pre-tax dollars, this means that an HSA provides a bigger tax break than an FSA if you save the full amount.

Probably the most attractive feature of HSAs is that there’s no pressure to use all the money in one year – funds saved in an HSA are able to accumulate year over year.

It might seem like HSAs and FSAs are interchangeable terms for the same account, but there are important differences between them. Be sure you know all the facts before you commit to opening either!

About Lindsay Meredith

Lindsay is a high school teacher and personal finance blogger. She lives, works, and plays in the Washington, D.C. area.

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