If your employer offers both health savings accounts (HSAs) and flexible spending accounts (FSAs), it’s natural to wonder how they differ. Understanding the basics of HSA vs. FSA accounts can help you decide which option may better fit your needs.
Unexpected medical expenses can happen at any time. For the millions of Americans who use HSAs or FSAs, these accounts can help offset certain healthcare costs when used appropriately.
Both account types have different rules and features. Reviewing the key distinctions below can help you better understand how an HSA vs. FSA works.
What Are HSAs and FSAs?
Health savings accounts (HSAs) and flexible spending accounts (FSAs) are tax-advantaged accounts that employers often offer as part of a benefits package.
In general, both accounts allow you to contribute money on a pre-tax basis and use those funds for qualified healthcare expenses. Contribution rules, eligible expenses, and tax treatment depend on the account type and applicable regulations.
Employers may contribute to these accounts, and employees can typically contribute through payroll deductions if they qualify.
HSA vs. FSA: The Key Differences
While HSAs and FSAs share similarities, there are several important differences to understand.
Special Qualifications
Not everyone is eligible to participate in both types of accounts.
To be eligible for an HSA, you must generally be enrolled in a high-deductible health insurance plan. For example, certain plans require minimum deductibles and maximum out-of-pocket limits, which are set by the IRS and may change from year to year.
FSAs do not require a specific type of health insurance plan. However, FSAs are typically only available to employees through an employer-sponsored benefits program and are not generally available to self-employed individuals.
Contribution Limitations
Both HSAs and FSAs have annual contribution limits, which may not cover all healthcare expenses.
HSA contribution limits are set by the IRS and can change annually. For example, limits have historically differed for individuals and families, with additional catch-up contributions allowed for people age 55 or older.
FSAs also have annual contribution caps determined by federal rules. These limits are generally lower than HSA limits and apply per employee, regardless of family size.
Because limits can change, it’s important to check current IRS guidelines during enrollment.
Account Ownership
Although both accounts are often offered through employers, ownership differs.
FSAs are employer-owned accounts. If you leave your employer, unused FSA funds are typically forfeited, subject to plan rules.
HSAs are owned by the individual employee. Funds generally remain with you even if you change jobs or become self-employed.
Handling Extra Funds
Unused funds are treated differently depending on the account.
With an HSA, unused funds typically roll over from year to year without expiration, allowing balances to grow over time.
FSAs usually follow a “use-it-or-lose-it” structure. Some employers may allow limited flexibility, such as a short grace period or a capped carryover amount, depending on plan design and IRS rules. Details can be found in guidance such as this overview of FSA rollover options.
Fund Availability
Another difference is when funds become available.
An HSA generally works like a savings account: funds are available as they are contributed.
An FSA, however, often makes the full annual election amount available at the start of the plan year, even though contributions are deducted from each paycheck over time. If you leave your employer after using more than you’ve contributed, you may be required to repay the difference, depending on plan terms.
Understanding Your Healthcare Cost Options
Healthcare expenses can have a meaningful impact on your finances, but understanding your options can help you plan ahead. By comparing HSA vs. FSA features, eligibility requirements, and limitations, you can make a more informed choice based on your healthcare needs and financial situation.
