FSA vs. HSA: What to Know About the Accounts That Pay Medical Costs

Two types of accounts can help you pay for medical costs and have tax benefits, but both also have possible downsides, two recently published reports found. (Till Lauer/The New York Times)
Two types of accounts can help you pay for medical costs and have tax benefits, but both also have possible downsides, two recently published reports found. (Till Lauer/The New York Times)

Two types of accounts can help you pay for medical costs and have tax benefits, but both also have possible downsides, two recently published reports found.

The two are flexible spending accounts and health savings accounts — better known as FSAs and HSAs. They’re related, though they have some big differences.

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FSAs are available only through employers. Workers set aside a fixed amount of money each year to be deducted from their paycheck before taxes, reducing their taxable income while helping them pay for out-of-pocket medical costs. But if workers change employers, the account doesn’t move with them.

Workers also face deadlines for spending their FSA money on eligible care or products, although many employers offer grace periods or the option to roll over some funds from one year to the next.

In a new analysis of more than 3 million accounts, the Employee Benefit Research Institute found that more than half of participants (52%) failed to spend down their accounts in time and forfeited at least part of their contributions back to their employers in 2022, up from 44% in 2019.

“We did notice high shares of account holders forfeited funds,” said Jake Spiegel, a research associate at the institute and the author of the report.

The average amount forfeited in 2022 was $441, compared with $369 in 2019, the analysis found. The exact amounts forfeited in 2020 and 2021 are unclear because the “use it or lose it” rules were relaxed during the pandemic. It may be that FSA account holders were caught off guard by the return to pre-COVID forfeiture rules in 2022, Spiegel said.

HSAs have higher contribution limits than FSAs and don’t have any spending deadlines. Funds in them can grow indefinitely, and the accounts move with you if you change jobs. (If your health plan qualifies, you can also open one on your own, even if your employer doesn’t offer the option.)

HSAs pack potentially powerful tax breaks: Contributions can be deducted pretax from your paycheck (or deducted on your tax return); interest or investment gains are tax-free, so the accounts can be used for long-term savings; and withdrawals are tax-free if the money is spent on eligible medical care and products. (Two states, California and New Jersey, tax contributions and investment gains at the state level, according to investment company Vanguard.)

Use of the accounts has surged, with about 36 million HSAs in 2023 holding more than $116 billion.

A big catch, however, is that HSAs are available only with certain types of health plans with high deductibles (an amount you pay for care before insurance pays). The accounts were originally offered to make the plans with high deductibles more attractive. While the coverage often offers lower monthly premiums, patients typically pay more costs out of pocket. HSAs can offset some of those costs because employers often chip in some cash.

Some progressive groups see the accounts as most benefiting the affluent, who can afford to pay for care out of pocket while investing their HSA contributions for use in retirement. (Withdrawals remain tax-free when used for health care and are taxed as ordinary income, without penalty, when spent on nonqualifying purchases after age 65.)

“HSAs primarily serve as a tax shelter for people with high incomes,” said Gideon Lukens, senior fellow and director of research and data analysis at the Center on Budget and Policy Priorities, a progressive think tank. Some workers, however, may be offered a high-deductible health plan as their only coverage option, he said, which can cause financial strain.

The Consumer Financial Protection Bureau reported this month that HSAs had room for improvement. Many accounts pay anemic interest rates on balances — typically less than 1%, even as interest rates on many online savings accounts have risen. And they often have fees — like monthly management fees, fees for paper statements and exit fees if savers want to move their balances elsewhere — that can “chip away” at the funds, Rohit Chopra, the bureau’s director, said in a statement.

“Many consumers do not realize the fees, switching costs and low interest yields that will come with the accounts,” he added.

For example, the report said, two providers, HealthEquity and HSA Bank, charge a $25 fee for closing an account.

“Most HSA providers charge fees to help cover essential overhead costs,” a HealthEquity spokesperson said in an emailed statement. “We work to minimize these, communicate with our members about them and provide value that exceeds any administrative expenses. Accounts are closed for many reasons, and account holders are given notice in advance.”

The company added that it was reviewing the consumer bureau’s report and took “all feedback seriously.”

In a statement, HSA Bank said that “the closure fees are an offset to managing a complex transfer and liquidation process” and added that the fees “are disclosed to every consumer and impacts a very small percentage of account holders in any given year.”

In some cases, transferring funds from one HSA to another can take weeks, during which the original account continues to charge a monthly fee, the report said. It also cited consumer complaints about funds that were lost during the transfer from one bank to another.

Research firm Morningstar evaluated 10 HSA plans in October using criteria like fees, interest on savings and investment choices. (The firm looked only at accounts available directly to individuals, rather than those offered through employers, so details may vary.) Fidelity Investments was the only provider rated “high” overall for both spending and investing. Its HSA offered an interest rate on savings well above 2%, while its competitors paid less than 1%.

“That’s a big shortcoming,” said Greg Carlson, senior manager research analyst at Morningstar.

Here are some questions and answers about health accounts:

Q: How can I best avoid having money left over in an FSA?

A: Sara Taylor, senior director of employee spending accounts at benefits consultant WTW, suggests taking a close look at your past medical expenses before deciding how much to contribute to your FSA. “It’s hard to do, for some people,” she said. But looking at your “explanation of benefits” for last year — the forms that describe what treatments you had and what share of the cost you owe — can help you come up with a reasonable number. Was last year an anomaly because you had major surgery? If so, you may want to contribute a lower amount. Many employers offer online tools to help you make an estimate.

It also helps to know what you can spend FSA money on. That way, if you find yourself with a balance at the end of the year, you can use the money to buy eligible over-the-counter items like pain medication and even sunscreen. A helpful resource is the FSA Store, which includes an online alphabetical list of eligible and ineligible items.

Q: If I forfeit cash in my FSA to my employer, have I wasted my money?

A: No one wants to give up funds, but workers can still come out ahead, compared with not contributing, because of the tax benefits of FSA contributions, Spiegel said. Say a hypothetical worker with a 30% marginal tax rate (including federal, state, payroll and local taxes) contributes $1,500 to an FSA, realizing $450 in tax savings. If the worker forfeits less than $450 back to the employer, the worker will still have benefited from participating.

Q: How much can I contribute to health accounts in 2024?

A: This year, an employee can contribute up to $3,200 in payroll deductions to an FSA. (Few contribute the maximum, however, possibly because of “inertia,” Spiegel said. The amount set aside tends to remain constant year to year, perhaps because employees aren’t aware the limit can change annually.) The average contribution in 2022 was just under $1,300.

For HSAs, individuals can contribute up to $4,150 in 2024, and families can contribute up to $8,300. People 55 and older can contribute an extra $1,000. For 2025, the limit for self-only coverage will rise to $4,300 and to $8,550 for family coverage.

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