HSA vs. FSA: Which Is Right for You?
Key takeaways:
Health savings accounts (HSAs) and flexible spending accounts (FSAs) provide tax advantages when you use the funds to purchase qualified medical expenses that are not covered by your health insurance plan.
There are important differences between HSAs and FSAs when it comes to taxes, qualifications, rollover options, and contribution limits.
While you can contribute to an FSA if you have a traditional health insurance plan, you must have a high-deductible health plan to contribute to an HSA.
It’s easy for people to confuse health savings accounts (HSAs) and flexible spending accounts (FSAs). Besides having similar names, they both provide tax advantages if you spend your funds on IRS-qualified medical expenses like prescription eyeglasses and blood pressure monitors.
But there are some major differences when it comes to eligibility, contribution limits, and account features. For example, you can invest the money sitting in an HSA, and any remaining funds automatically roll over every year. But you must have a qualified high-deductible health plan (HDHP) to contribute money to this type of account. Before you sign up for an HSA or FSA, it’s important to understand the rules, so you can take full advantage of your account benefits.
What are the primary differences between HSAs and FSAs?
Figuring out if you should open an HSA versus an FSA can be complicated and even frustrating. But understanding the main ways that these accounts differ can help. The following chart shows some of the primary differences between HSAs and FSAs.
| HSAs | FSAs |
Eligibility | You must have a high-deductible health plan. | You can have a traditional health plan. |
Contributions | The IRS sets annual limits for individual and family accounts. | Health FSAs have one, blanket contribution limit that applies to all accounts. And this annual limit is typically lower than the HSA contribution limit. |
Rollover | Your unused account funds roll over every year. | You might lose your funds if you don’t use them by the end of the year. |
Ownership | You own the account. | Your employer owns the account. |
Investing potential | Yes | No |
Portable | If you leave your job or get terminated, you can keep the funds in the account. | You forfeit the funds in the account if you leave your job or are terminated. |
Looking at the 7 main differences between an HSA and FSA
Below, we take an in-depth look at the seven differences between HSAs and FSAs outlined in the chart above.
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1. Contribution limits
The annual contribution limits for HSAs are typically higher than FSA limits. The IRS adjusts the contribution amounts for both types of accounts each year for inflation.
An HSA has two different types of contribution limits. There’s one limit that applies to individual coverage and one that applies to family coverage. Your employer can make contributions to your HSA. But the total of your contributions and your employer’s contributions cannot exceed the IRS limit.
Let’s say the annual contribution limit for an individual coverage HSA is $4,150. If your employer contributes $1,000 to your HSA for individual coverage, then you can contribute up to $3,150 for the year.
Health FSAs only have one, blanket contribution limit that applies to all accounts. And, unlike an HSA, the amount that your employer contributes to your FSA won’t impact the total amount you can contribute.
2. Investment options
You have the potential to grow your HSA balance by investing the money in your account. Depending on the firm you hold your HSA funds with, there may be a minimum amount of money you must have in your account before you can invest. It can be minimal, like $25, or much higher, like $2,000.
You can invest HSA funds into assets like:
Stocks
Bonds
Exchange-traded funds (ETFs)
Mutual funds
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You cannot invest the money that you contribute to an FSA. The money that you (and your employer) elect to set aside in an FSA can only be used to pay for qualified medical expenses.
3. Rollover rules
The funds in your HSA are automatically carried over to the next year. This means your HSA balance can continue to grow every year if you don’t spend the money in your account. The funds in your HSA won’t expire if you don’t use them within a certain period of time.
There is no automatic rollover with an FSA. You usually have to forfeit any unused funds at the end of the year. Some employers might offer a grace period or a carryover option, but they can’t offer both. Here’s how the two options work:
Grace period: Your employer may offer you a grace period to spend the remaining money in your account. This usually lasts for 2.5 months after the year ends.
Carryover: An employer can allow a certain amount of money to be rolled over from one plan year to the next. This is typically up to 20% of the maximum contribution amount for the year. For example, the annual contribution limit for FSAs in 2023 is $3,050, which means the maximum amount that your employer can allow you to roll over to the next plan year is $610.
It’s a good idea to ask your employer if they offer a carryover option when deciding your FSA contribution election for the year. This will help you avoid losing money at the end of the year.
4. Health insurance requirements
The type of health insurance you have determines which account you are eligible to contribute to for the year.
For example, an HSA must be paired with an HDHP. This type of plan typically has lower monthly premiums and a high deductible. Every year, the IRS releases HDHP guidelines to help you determine if your health plan is HSA-compatible.
You can contribute to an FSA if you have an employer-sponsored healthcare plan. However, if you enroll in an Affordable Care Act (ACA) marketplace plan, you will not qualify for an FSA.
5. Ownership
You own the funds in your HSA account. You can think about it like an individual retirement account (IRA) or 401(k). You can invest the money, cash it out, or transfer it to another account. And you do not lose ownership of your HSA if you leave your job, terminate your health insurance, or retire. The ownership for your account can also be transferred when you die if you designate a beneficiary or include the asset in a will or trust.
This is not the case for an FSA. Your employer owns the funds. If you switch jobs, you cannot take the funds in your FSA with you. But if you have coverage through COBRA (Consolidated Omnibus Budget Reconciliation Act), which allows you to keep employer-sponsored insurance after you leave a job, you can typically still use the funds in your FSA.
6. Retirement option
Since FSAs are tied to an employer, you won’t have access to this type of account if you are not working. You can still contribute to an HSA when you retire, as long as you have a qualifying HDHP. However, you will have to stop contributing to the account if you enroll in Medicare.
As mentioned, the unspent funds in your HSA roll over every year. If you don’t use all your HSA funds before you retire, you can use the money to cover qualified expenses during retirement. These expenses could include:
Over-the-counter (OTC) medications
If you decide to use money in your HSA to pay for nonqualified expenses after you turn 65, you will not have to pay penalties. You will only be responsible for paying taxes on your distribution.
7. Deadline to obtain reimbursement for expenses
You can use your HSA or FSA debit card to pay for qualified medical expenses if you don’t want to go through the reimbursement process. But if you end up paying for HSA-eligible items out of pocket, you can submit a reimbursement request at any time. There is no deadline to submit receipts for qualified expenses incurred while you have or had an HSA.
If you have an FSA, you generally must submit receipts for reimbursement before the end of the plan year (usually December 31). But your employer may provide an extension, also called a run-out period, to allow you to file claims for expenses incurred in the previous plan year.
How do I choose between an HSA or FSA?
It’s important to evaluate the pros and cons of each account to determine which one is best for you. The decision will ultimately depend on your personal situation and goals.
Here are some questions to consider when making your choice:
Are you younger and fairly healthy? If you don’t make regular visits to your healthcare provider, you may benefit from an insurance plan like an HDHP because your monthly premiums are usually lower. A qualified HDHP will allow you to contribute money to an HSA. And if you invest the funds, the money in your account can grow and accumulate over time.
When do you need the money? An FSA allows you to gain immediate access to the entire annual contribution at the beginning of the year, even though you haven’t contributed that much through payroll deductions. However, if you want to save the money for healthcare expenses during retirement, you won’t have that option with an FSA.
Do you have enough funds to cover an unexpected medical expense? An HSA may not be a good option if you do not have the money to cover unexpected medical expenses. HSA-eligible health plans have a higher annual deductible and out-of-pocket maximum.
The bottom line
While flexible spending accounts (FSAs) and health savings accounts (HSAs) both provide tax benefits when you pay for qualified medical expenses, there are major differences between the two. You can only contribute money to an HSA if you have a high-deductible health plan (HDHP), but you don’t have to worry about your funds expiring. You also own an HSA, which means you can still access it even if you leave a job.
With an FSA, the funds typically expire at the end of the plan year. Since your FSA account is owned by your employer, they decide many of the rules for your account.
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References
HealthCare.gov. (n.d.). Using a flexible spending account (FSA).
Internal Revenue Service. (2023). Publication 969 (2022), health savings accounts and other tax-favored health plans.
Trujillo, D. (2021). UIL: 125.00-00. Internal Revenue Service.
This article is solely for informational purposes. This article is not professional advice concerning insurance, financial, accounting, tax, or legal matters. All content herein is provided “as is” without any representations or warranties, express or implied. Always consult an appropriate professional when you have specific questions about any insurance, financial, or legal matter.
