What is the Difference Between a Health Savings Account and a Flexible Spending Account?

A health savings account and a flexible spending account are both benefit programs that allow employees to allocate pre-tax dollars for expenses related to health and family needs. Part of the difference between the two is spelled out in their names — Health savings accounts (HSAs) are savings accounts that allow people to save up money for health-related expenses, while flexible spending accounts (FSAs) contain money that is meant to be spent on a range of health services. Money left over in an HSA rolls over from year to year, while FSA funds do not. Only certain types of purchases are allowed with money from each account, but HSAs are more restricted and monitored by the US Internal Revenue Service (IRS).

The US government allows working people to set aside a certain amount of their earnings before they are taxed into a health savings account. HSA participants are provided with a special debit card from the administrator of the account to be used only for medical costs. The money can only be used for out-of-pocket medical expenses and prescription costs. Any other purchases made on the HSA debit card are subject to tax withholding.

Flexible spending accounts are specially administered accounts where pre-tax dollars can be used for a wider range of services. These expenses can include things like out-of-pocket medical bills, prescriptions, dental and vision care, vitamins and supplements, or alternative wellness services. Another difference between the two accounts is that FSAs can be used to pay for childcare, while money from HSAs cannot be used this way. FSA users must pay for these expenses and then submit a claim form to be reimbursed.

The balances in health savings account and a flexible spending account also are handled differently. FSA accounts are meant to be used up, or spent by the end of each annual period or the money is lost. Any money left over in HSA accounts, on the other hand, will be rolled over to the following annual period.

Before choosing to open a health savings account or a flexible spending account, people should understand how and why each program can be used. The pros and cons of both accounts can be discussed with a human resources representative before signing up for either program. In addition, it is possible for an employee to open both an HSA and an FSA, depending on his or her individual needs. People who want to pay for their healthcare most efficiently need to thoroughly understand how each account works and how they can get the maximum value out of these pre-tax programs.