A. FSA stands for Flexible Spending Arrangement and HSA stands for Health Savings Account (HSA). Both accounts are used to help pay for health care costs tax-free, but they are often misunderstood.
Most HSAs and FSAs are funded through paycheck deductions and employer contributions, pre-tax. If your company doesn’t offer a health account and you have a high-deductible health plan, you can sign up for an HSA or FSA through an independent broker and transfer money into the account yourself.
Both can be used for any type of medication, copays for doctor visits and other out-of-pocket medical expenses. However, if you use them for other sorts of expenses, you’ll lose the tax benefits.
Differences between HSA and FSA
FSA is a short-term account, because most money deposited into an FSA needs to be used that same calendar year, or you’ll lose it. The one exception is that some plans allow you to roll over $500 into the next calendar year. The money in FSA cannot be invested, it will be there earning you no return.
An HSA is a long-term account, it can stay open as long as you’re alive. You can invest the money you deposit into an HSA, tax-free.
Triple Tax Advantages
The HSA is the only account available to Americans with a triple tax advantage - the money put in is tax-free, the account balance can grow tax-free and you can spend it tax-free.
In our next blog post, we will describe another secret of using FSA or HSA money that few people are aware of.