SHORT ANSWER: An HSA and FSA help you save for qualified medical expenses. An HSA has higher contribution limits and allows you to carry funds over to new plan years, while an FSA does not.
During benefit enrollment periods, plan participants face many decisions, including which health insurance plan to select, whether to add dental and vision and what additional tools they want to enroll in, such as a health savings account (HSA) or flexible spending account (FSA). And when you have both options, it leads to big questions about HSA versus FSA features and benefits. Find a full listing of how these accounts work and a comparison to help you select the best financial tool based on your needs.
HSA vs. FSA: An Overview
Spend some time learning more about an HSA versus FSA account and why you might consider each option.
What Is an HSA and How Does It Work?
An HSA helps you set aside pretax money for health care expenses. Even once you withdraw the money, you’ll enjoy tax-free advantages as long as you use the funds on qualified medical expenses. Using an HSA can help increase the funds you have for medical bills.
You’ll save on taxes on every dollar you place in an HSA, which can be a smart money move for people looking to lower their tax liability.
Because HSA funds carry over from year to year, maxing out contributions can also be a strategic money move to help plan for retirement when healthcare expenses can increase as you age.
HSAs also allow you to grow the funds held in the account through investments and interest. Some accounts have balance requirements before you can invest the funds. Be sure to read the requirements for your account before finalizing your account selection.
While you can invest your HSA funds, one disadvantage to these accounts is that the investment limits and interest earnings are low compared to other account options. Another HSA disadvantage is that you can’t start investing the funds until you’ve met minimum balance requirements. Finally, the investments are not insured, which can lead to greater risk.
What Is an FSA and How Does It Work?
An FSA works similarly to how an HSA works but with a few key differences. An FSA still allows you to place pretax funds in an account designated for qualifying medical expenses.
The largest challenge with an FSA is that the funds do not carry from one year to the next. That means that you’ll need to accurately estimate your medical expenses for that plan year to avoid losing the funds. You will get a grace period of up to 2½ months to use the money in your FSA so plan accordingly and complete medical exams and procedures when you know you have additional funds available.
While employers can contribute to FSA accounts, it is less common than with HSA plans.
Some employers offer the option for a dependent care FSA, which differs from a standard FSA. These accounts can help pay for childcare or adult care expenses to allow you to work, look for work or attend school. These accounts function independently from your health insurance plan and allow employees to set aside pretax dollars toward care expenses. Just like the healthcare account, you cannot carry funds forward into the next year so you’ll need to estimate expenses accurately.
HSA vs. FSA: Key Similarities and Differences
The biggest differences between an FSA and an HSA are the contribution limits and whether you can carry the funds forward to another plan year. An HSA has a higher contribution limit and allows you to invest those funds while carrying over unused funds from year to year. FSA contributions max out at $3,200 and you can’t carry over unused funds into the next plan year or invest the funds.
Learn common similarities and differences between these financial tools that can help you save for and pay for medical expenses pretax.
| Health savings account (HSA) | Flexible spending account (FSA) | |
| Fund carryover year-to-rear | Yes | No |
| Funds investment | Yes | No |
| What determines whether you can open an account | Health insurance | Employer |
| Contribution limit | $4,150 for individuals and $8,300 for families. Additional $1,000 catch-up contribution for participants who are older than age 55. | $3,200, though if each spouse has an option, they can each contribute this amount. |
| Health plan compatibility | Only high-deductible health plans allow for HSAs | Nearly any plan is compatible |
| Eligible for add-on to marketplace plans | Yes | No |
| Employer contributions | Common | Rare |
| Contribution changes | Add funds and make contribution limit changes until tax day for that year | The contribution amount must be selected at the start of the year |
| Withdrawal rules | Use for medical expenses only until age 65 when you can use the HSA for retirement or other purposes and pay your ordinary tax rate. If you pull the funds for nonmedical use before age 65, you’ll incur a 20% penalty tax in addition to your ordinary tax rate. | Only for use on medical expenses with no options for alternative uses. |
| Ownership when leaving a job | HSAs can leave with you if you change jobs. The money remains yours. | If you leave a job, the funds cannot go with you, unless you opt for a COBRA continuation plan. |
Can You Have Both an HSA and an FSA?
You cannot enroll in both an FSA and HSA at the same time because the accounts serve the same purpose. However, you might be able to enroll in an HSA and a dependent care FSA at the same time. That’s because a dependent care FSA has a different purpose than an HSA. You’ll need to review whether your employer provides a dependent care option.
Save Pretax Money Toward Healthcare Expenses
Both FSAs and HSAs offer the opportunity to save pretax money toward your healthcare expenses. Use these accounts wisely to lower your tax liability and help save for medical expenses, both anticipated and unanticipated.
About Rebekah Brately
Rebekah Brately is an investment writer passionate about helping people learn more about how to grow their wealth. She has more than 12 years of writing experience, focused on technology, travel, family and finance. Her work has been published in Benzinga, Hearst Bay Area, FreightWaves and Dallas Observer publications.