FSA vs. HSA accounts

Key points

• With both a flexible spending account (FSA) and a health savings account (HSA), you can put aside pretax money to pay for eligible health care expenses.
• FSAs are only available through an employer, while HSAs are available to almost anyone with a high-deductible health insurance plan.
• You typically must spend the money in your FSA within the year (with some exceptions), while you can carry over HSA funds indefinitely and even invest the funds.
• HSAs are triple tax-advantaged: You don’t owe taxes on your contributions, your earnings grow tax-free and withdrawals for health care costs are tax-free, too.
• Annual contribution limits for FSAs and HSAs differ.

Health care can be a serious drag on your budget. In fact, the average household spends 8.1% of its income on health care, according to the U.S. Bureau of Labor Statistics.

Two different tax-advantaged savings accounts — health savings accounts (HSAs) and flexible spending accounts (FSAs) — can help you save on health care costs, and give your budget a break. But how these plans work in terms of contribution limits, eligibility and more varies a great deal.

Learn the ins and outs of FSA vs. HSA accounts to decide which is best for you.

What is an FSA?

A flexible spending account (FSA) is a valuable employee benefit that lets you set aside pretax money to pay for certain health care expenses. Those include copayments at the doctor’s office, prescription medications and what you spend to meet your deductible.

You can also use FSA funds to pay for a wide range of common health-care-related expenses such as prescription glasses and contact lenses, acne medications, birth control, dental treatments, medical equipment like crutches and far more.

Keep in mind that the funds in your FSA generally don’t roll over from one year to the next, but your employer may give you a two-and-a-half-month grace period to spend the money or allow you to carry over up to $610.

According to certified financial planner Jay Zigmont, there are benefits and drawbacks to FSAs.

“The bonus is that you get to pay for medical expenses without paying taxes on your income,” he said. “The downside is that an FSA is ‘use it or lose it,’ which means if you don’t use it all during the plan year, it does not roll over, and the money is gone.”

If you don’t use the money in your FSA by year-end or by the extended deadline, you will lose the funds. So set aside only as much money as you know you will spend on health care during the year.

Plus, your funds aren’t portable. If you leave your company, you lose the money in your account.

Eligibility

Not everyone can fund an FSA. You’re eligible only if your employer offers an FSA as an employee benefit. If you purchase an individual health insurance policy on your own, such as through the Health Insurance Marketplace, you’re ineligible for an FSA.

Contribution maximums

For 2023, the FSA contribution limit is $3,050 per employee. In some cases, your employer may also contribute to your FSA.

What is an HSA?

A health savings account (HSA) is similar to an FSA. If you have an HSA-eligible health insurance plan, you can set aside pretax dollars in an HSA to pay for qualifying medical expenses.

Beyond that, there are key differences. While an FSA is owned by your employer, you own your HSA, whether you fund one via your job or on your own. That means you can roll over the money in your HSA from year to year.

With an FSA, your money sits in the account until you spend it that year. But with an HSA, you have the option of using the money for current health care expenses or investing it in stocks, bonds, mutual funds and more so it can grow and cover future needs.

HSAs are triple tax-advantaged: You contribute pretax dollars, your investments grow tax-free and your withdrawals are also tax-free as long as you spend the money on eligible health care expenses.

“The difference between an HSA and FSA is that you can invest in an HSA and don’t need to use it up each year,” said Zigmont. “Many people are planning on keeping money in their HSA to help pay for health care expenses in retirement.”

Eligibility

“An HSA is only available for people in a high-deductible health plan,” said Zigmont. “You may have a choice between an insurance plan with a high deductible and one without. Choosing the plan with a high deductible may get you access to an HSA, but look carefully at your total out-of-pocket costs.”

To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP), either employer-sponsored or a plan you buy on your own. In 2023, an HDHP is defined as a plan with a deductible of $1,500 or higher for an individual and $3,000 or higher for family coverage.

Also, to be eligible for an HSA, you cannot be enrolled in Medicare or be claimed as a dependent on someone else’s taxes.

Contribution maximums

In 2023, the maximum you can contribute to an HSA is $3,850 for self-only coverage, and $7,750 for family coverage. If you are 55 or older, you can contribute an additional $1,000.

How do FSAs compare with HSAs?

While FSAs and HSAs share some similarities, there are some key differences to keep in mind.

Eligibility

FSAs and HSAs have different eligibility requirements. Anyone can qualify for an FSA — regardless of their health insurance plan or deductible amount — if their employer offers this benefit. If you purchase private health insurance on your own, you’re not eligible for an FSA. You can contribute to an HSA only if you are enrolled in an HDHP.

Contribution limits

HSAs have higher contribution limits than FSAs do. A single person can contribute up to $3,850 to an HSA in 2023. The annual max for an FSA is $3,050.

Portability

FSAs are tied to your employment. If you leave your job, you will lose access to the funds in your FSA. With an HSA, you own the account and the money in it.

Investment options

With both FSAs and HSAs, you contribute pretax dollars. But with an HSA, you can invest those contributions, and the earnings are tax-free.

Expiration of funds

HSAs have the advantage over FSAs in terms of timing. Your HSA balance never expires — you can roll over your contributions and earnings from year to year. FSAs don’t have the option. They are “use-it-or-lose-it” accounts, so you typically have to use the money by the plan deadline or you’ll lose that cash.

FSA vs. HSA: Which is better?

So which account is better: an FSA or HSA? The answer depends on a variety of factors, including your eligibility, contribution limits and tax situation.

HSAs offer more flexibility than FSAs when it comes to contributions and portability. And with triple tax advantages, HSAs are hard to beat. If you’re eligible and can afford to contribute the maximum, an HSA is likely your best bet. But if you’re not eligible for an HSA, an FSA may be a good option.

The bottom line: Both HSAs and FSAs have their pros and cons, so it’s important to weigh the options and choose the account that’s best for you.