HSA FSA Difference Advantages Disadvantages explained in detail

FSA the flexible spending account is a common benefit offered by employers to its employees on a pre-tax basis. Similarly HSA the Health Savings account is another pre-tax option available to its employees. So, what is the basic difference between Flexible Spending Account aka FSA and HSA? 1) Both are pre-tax contributions and used for eligible medical expenses including co-pay , OTC drugs  also called as over the counter drugs (only drugs labeled as FSA), prescription drug extra amount reimbursement etc 2) FSA is based on use or lose concept (i.e) How long you can withhold money in that account. It is valid for only one year typically the financial year in which you have enrolled for insurance. If the amount is not used it extinguishes at year end 3) HSA is a roll over from year to year. It can be used in retirement. Even if you switch employers you will not lose money 4) There is an annual contribution limit on FSA however there is a higher limit on HSA 5) As per latest tax rules the annual contribution limit on FSA is $2700 for 2019 and this keeps changing every year. The IRS approves $7000 as the maximum contribution amount onto HSA for 2019. This has been increasing in increments of $50 per year for the past few years. This trend is expected to continue You have contributed excess amount onto HSA. Is there a penalty and tax associated with this? Is there a way to avoid these? As part of personal finance investing in pre-tax instruments is an essential step that each and every one of us should consider. The basic principle of investment is start early as money has compounding nature and the earlier you start the better you are. HSA the health savings account is an interesting pre-tax phenomenon that you can consider while choosing medical insurance. As opposed to HRA the amount invested stays with you, can be invested in mutual funds, earns fixed interest rate etc. The amount can be used to pay insurance premium in case of unemployment and what not. HSA comes at the cost of high deductible but low premium. Also, you get employer contribution. Many insurance providers do run incentive programs that enables you to earn significant amount for say biometrics, annual physical, preventive care, health coaching for goals such as weight loss, stress management, quitting tobacco, family preventive care including kids welfare, maternity care by talking to maternity nurse etc. All these incentives are earned on completion of goals one by one. There is a great possibility of exceeding maximum annual allowed IRS limit every year. This is an issue as the excess amount will be taxed and a penalty of 20% will have to be paid if not carefully monitored. It is recommended to monitor the amount contributed to HSA account at the end of december to make sure you dont exceed annual set limit I have exceeded limit. I want to avoid penalty. What next? It is easy and simple. Contact your HSA administrator before end of year or April 15th of forthcoming year at maximum particularly before filing taxes. Get the excess withdrawal form Fill the form and mail to P.O. Box or fax them You get a cheque on excess amount after tax deduction This helps you avoid penalty on excess contribution made by mistake