Created to address rising healthcare costs, health savings accounts (HSAs) and flexible spending accounts (FSAs) are two distinct tools that provide consumers with tax-advantaged ways to save. As of 2023, roughly 58% of US private employers offer an FSA benefit, and nearly 60 million Americans are covered by HSAs.
Both HSAs and FSAs often offer their beneficiaries a debit card of sorts that they can use to pay for certain health-related expenses, such as prescription and doctor's appointment copays, a wide variety of pharmacy items like sunscreen and bandages, and more (although some FSAs require one to pay out of pocket first, then request reimbursement). People with FSAs or HSAs do not have to pay taxes on the funds they put into these accounts.
Generally speaking, any leftover FSA funds typically expire each year and can't be rolled over. HSA funds never expire, and the money can even be invested in securities.
Unlike HSAs, FSAs must be obtained through an employer. Employees can contribute money to their FSA throughout the year, and some employers contribute funds to employee FSAs as well. While employers can also provide HSAs, most banks or credit unions can open them for individuals as well. However, HSAs are only available to those with a high-deductible health plan.
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High-deductible insurance plans often have low monthly premiums, but require policyholders to meet a set spending threshold on medical expenses each year before the insurance kicks in. Health savings accounts give high-deductible plan holders a tax-free savings account to balance the high upfront costs that come with an HDHP.
After medical savings accounts in Singapore and South Africa proved successful, the US introduced a pilot program for small business owners and the self-employed to pair with high-deductible health plans in 1996. In 2003, Congress passed a law inspired by that program, and health savings accounts became tax-free and open to anyone with a high-deductible plan. FSAs, on the other hand, date back to the 1970s.
Flexible spending arrangements (FSA) have use it or lose it deadlines defined in the plan. Employers that offer FSAs get to keep any unused funds, but that money has to go towards administering the FSA program. Remaining FSA funds can also be pooled and divided evenly amongst a company's FSA participants, but very few companies actually do this.
Unlike health savings accounts, which can be opened at banks and credit unions, FSAs are employer-owned and operated—meaning you can only access an FSA through an employer benefit, and the account doesn't follow you if you move jobs. To use an FSA to pay for a medical service or product, purchases typically have to be uploaded, approved, and then employees can be reimbursed.
Health savings accounts and flexible spending accounts are designed to be tax-advantaged ways for people to save money on healthcare and medical expenses. But one recent study found that HSAs can increase families' total out-of-pocket spending on healthcare by more than $500 per year.
After the "One Big Beautiful Bill" took effect, Medicare users with bronze or catastrophic level health plans, as well as certain medical care membership models and telehealth users, became eligible for HSAs. Supporters of HSAs say expanding access to this savings program is more effective in alleviating high consumer costs than subsidizing healthcare plans or direct treatments.
Flexible spending accounts can be used to cover medical expenses, but those funds can also be used to purchase wellness items or services, like bandages or contact solution. The general guidance for what's FSA eligible is any expense that is designed to diagnose, cure, mitigate, or treat a medical condition. HSA funds can often be used to cover the same expenses.
Health savings accounts offer large tax advantages, but require personal contributions. Some argue that the tax advantages benefit wealthy individuals more than anyone else and that HSAs don't do much to help people who can't afford to regularly contribute to one. As a result, HSAs only decrease costs for those who can comfortably invest in them, and health inequalities between high-income and low-income individuals are exacerbated.
One of the reasons HSAs are so popular is the plan's triple-tax advantage. All contributions to an HSA happen pre-tax, funds in the HSA can be invested in stocks, bonds, or exchange-traded funds, and withdrawals to cover medical expenses are tax-free.
Because health savings accounts are designed to alleviate high upfront costs for people with high deductible health plans, the majority of HSA spending happens early in the year. However, around 10% of flexible spending account funds are used in December—right before the use it or lose it deadline.
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