FSA vs HSA - Which is right for me?

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FSA

First, let’s talk about FSAs, or Flexible Spending Accounts. There are two types of FSAs that Justworks offers: Healthcare FSA (HCFSA) and Dependent Care FSA (DCFSA). It is important to note that FSAs are "use it or lose it." If you don’t spend the money by the end of the plan year, you lose it. Also, if you change jobs, that money doesn’t go with you. Finally, there are annual limits on how much you can contribute each year, which are set by the IRS.

HCFSA

With Healthcare FSAs (HCFSA), you decide how much money to set aside for qualified healthcare expenses when your plan starts. The best part? You get that full amount upfront, even though it comes out of your paycheck throughout the year. For example, if you set aside $1,200, you can spend all of it as soon as your plan kicks in, even if you haven’t paid it all yet.

DCFSA

A Dependent Care FSA (DCFSA), helps cover things like daycare, preschool, or even after-school programs for your kids. Like regular FSAs, you set aside pre-tax money, but it’s for childcare and adult care expenses. Unlike a HCFSA, you can only spend the money you’ve actually contributed. 

HSA

Now, let’s talk about HSAs, or Health Savings Accounts. You can only have one if you’re on a High Deductible Health Plan (HDHP), which has lower monthly premiums but higher costs when you need care. With an HSA, you can only spend the money you’ve actually contributed, but the leftover funds roll over year after year, and the account stays with you even if you switch jobs or insurance plans. Plus, HSAs can earn interest, and you can even invest the money to grow your savings over time. Like FSAs, there are also limits on how much you can contribute to your HSA each year, and those limits are higher for families than for individuals.

Comparing HCFSA + DCFSA vs HSA

So, what’s the big difference? 

HCFSAs give you your full amount upfront, but you have to spend it within the year, and there are contribution limits. DCFSAs are similar to HCFSAs, however you can only spend what you’ve contributed so far. HSAs let your money roll over year after year and stay with you for life, but you can only spend what you’ve put in so far.

So, if you like having your healthcare funds available upfront and you know what you’ll spend, a HCFSA could be a good choice. But if you’re looking for long-term flexibility and savings, and you have a High Deductible Health Plan, an HSA might be the better fit.

Can I have an FSA and HSA at the same time?

No. Based on IRS guidelines you can only have either a Healthcare FSA or an HSA within the same calendar year. 

The good news is that you can have both a DCFSA and HSA at the same time. Likewise, you can have a Healthcare FSA at the same time as a DCFSA.

Here's a chart to help you understand key differences between Healthcare FSAs and HSAs options.

Eligible Expenses

For a list of eligible expenses, check out IRS publication 502.

Switching From an FSA to an HSA: What’s Allowed and When

IRS rules limit participation in a Healthcare FSA and a Health Savings Account (HSA) at the same time.

Key rules

• You generally cannot contribute to an HSA while covered by a healthcare FSA (even if it has a $0 balance).
• The FSA must end before HSA contributions can start.

Mid-year changes

You cannot switch from a healthcare FSA to an HSA mid-year unless the FSA is terminated and you meet HSA eligibility. Most plans do not allow mid-year FSA termination without a qualifying event.

At renewal

If you remain on an HSA-compatible medical plan at renewal, let the FSA end and enroll in the HSA for the new plan year.

Plan eligibility for HSA

You must be enrolled in a qualifying High Deductible Health Plan (HDHP), have no disqualifying coverage (like a healthcare FSA), not be enrolled in Medicare, and not be claimed as a dependent on someone else’s tax return.

Disclaimer

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.