HSA vs. FSA: Which Is Better?

Both provide a tax shelter for medical expenses, but HSAs are more flexible

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Depending on the kind of health insurance plan you have and the benefits your employer offers, you might be eligible for a health savings account (HSA) or a flexible spending account (FSA). Taking advantage of these accounts can help you save money and prepare for medical expenses that come up during the year.

HSAs and FSAs have different qualifications and advantages, however. Here's everything you need to better understand HSAs and FSAs before signing up.

What's the Difference Between an HSA and an FSA?

  HSA FSA
Qualifications or Requirements A high-deductible health plan (HDHP) is required.
The minimum deductible to qualify is $1,400 for individual plans or $2,800 for family plans.
You can't be enrolled in Medicare and you can't be declared a dependent on another person's plan.
No requirements; usually offered through a group or employer.
What If You Change Employers? Unused money in an HSA stays with you even if you change employers. FSAs do not follow you to your new employer, so you may lose any money in the account that you don't use.
Rollover Rules Unused funds in your HSA will roll over every year and can be saved in your account for the long term. Typically, $550 can be carried into the next plan year or employers may allow an additional 2.5 months to spend the previous year's contributions, depending on what the employer allows.
In 2021, there were special rules allowing all funds to be carried over if the employer allowed it.
Annual Contribution Limits For 2022, the annual contribution limits are $3,650 for individual plans and $7,300 for family plans. That's up from $3,600 and $7,200 in 2021. For 2022, the individual FSA contribution limit is $2,750.
It is up to your employer to allow contributions up to that limit or not.
Changes to Contributions Yes, as long as contributions are below the annual limit. Generally, changes can only be made during open enrollment, unless you have a qualifying life event, or you change your plan or employer.
Long-Term Savings Potential Yes No
Penalty for Using the Funds Prior to age 65, funds you use for non-medical expenses must be declared on your tax return, and are subject to a 20% penalty. Accumulated savings can be withdrawn after age 65 in retirement and used without penalty. Penalties may depend on your employer and FSA.
Contact your plan administrator or employer for details.
Tax Savings Contributions can be made pre-tax directly from your paycheck.
Contributions are tax-deductible and grow tax-deferred.
Accumulated savings can be withdrawn tax-free after age 65.
Funds used for qualified medical expenses are not taxed.
Contributions can be made pre-tax directly from your paycheck.
Funds used for qualified medical expenses are not taxed.
Special Notes HSAs may be accessible in different ways; be sure to ask if you will have a debit card and how expenses and reimbursements work. FSAs may allow a small carryover or grace period.
However, this is at the discretion of the plan administrator or employer, so contact yours for details.

Qualifications or Requirements

In order to be eligible for a health savings account, you must choose a high-deductible health plan (HDHP). You can't be declared a dependent on someone else's plan and you can't be enrolled in Medicare, either. You can open an account through your employer or on your own, and the minimum deductible for 2022 is $1,400 for individuals and $28,000 for families.

A flexible spending account can only be opened through an employer or other group offering it, but there are no additional qualifications or restrictions as there are with an HSA.

Qualified Health Expenses

HSAs and FSAs are meant to cover qualified health expenses. Health insurance premiums typically aren't considered a qualified medical expense by HSAs unless you're paying for COBRA coverage or receiving unemployment. Prescription medications, including insulin, can be paid for with both types of accounts. Over-the-counter medicine and menstrual care products are also qualified expenses.

You can typically use the accounts to cover copayments and deductibles for doctor visits and hospital stays. Essential dental care is considered a qualified health expense, but teeth whitening isn't. Eyeglasses are also a qualified expense. In general, if it's something you could deduct as a medical expense on your taxes, you can use HSA or FSA funds to pay for it.

You can withdraw funds from an HSA to use for non-medical spending, but you will pay income tax and a 20% penalty until age 65. After age 65, you only pay income tax on amounts you withdraw for non-medical reasons, so an HSA could also be an additional source of retirement funds.

Restrictions

Because both types of plans offer a tax-free way to save for medical expenses, both come with restrictions. However, generally, FSAs are the more restrictive of the two plan types. For instance, you can't transfer your FSA to a new employer when you change jobs and you can only change your contribution during open enrollment or when you have a qualifying life event such as getting married or having a child. These limits don't apply to HSAs.

The biggest difference between the two accounts, though, is in terms of the money you can put in and how long you can keep it there. You can put more into an HSA each year and roll over your leftover balance at the end of the year.

For 2022, the annual contribution limit for an HSA is $3,650 for individuals and $7,300 for families. For an FSA, the 2022 annual contribution limit is $2,750 (unchanged from 2021).

With an FSA, employers may allow you to carry over up to $550 to the next plan year or allow you a 2.5-month grace period to spend the previous year's funds. If your employer allows rollovers, you may be able to carry over your full contributions from 2021 to 2022.

Tax Incentives and Savings Potential

Both HSAs and FSAs offer the same tax advantages upfront—you can put money into the accounts and withdraw it to pay medical expenses tax-free. However, HSAs offer far greater tax advantages and savings potential.

Because you can roll over your balance each year, your HSA becomes another savings vehicle within your broader financial portfolio. This money also grows tax-deferred, meaning you won't pay any taxes on the growth until you withdraw the money. However, if you wait to withdraw that money after age 65, during retirement, you can withdraw it tax-free. Because of these features, many people use an HSA as a secondary retirement savings account.

With both HSAs and FSAs, you benefit from tax savings because the funds you deposit are pre-tax. That means they're deducted from your income before taxes are taken out. This reduces the amount of your taxable income.

Which Is Right for You?

Overall, HSAs are more flexible. They allow you to save money by paying less in taxes and enable you to save money long term since whatever you don't use in any given year will roll over and accumulate as savings over time. You do have to have an HDHP, though, and not everyone is comfortable with a high-deductible insurance plan.

An FSA doesn't build up over time, and you can lose leftover funds at the end of the year. You also stand to lose your FSA if you change employers. An FSA does offer tax savings and budgeting for medical expenses, so if you don't qualify for an HSA, an FSA is also a good option.

Can You Have an HSA and an FSA at the Same Time?

You can only have an HSA and an FSA at the same time if the FSA is designated as a limited-purpose FSA. These FSAs must have a specified purpose, such as covering long-term care costs rather than the regular medical expenses being covered by the HSA.

Impact of the CARES Act on FSAs and HSAs

The Coronavirus Aid, Relief, and Economic Security (CARES) Act created important provisions for health savings accounts (HSAs) and flexible spending accounts (FSAs) for 2020 and 2021.

One crucial change applied to telehealth appointments. Under the CARES Act, patients with high-deductible health plans paired with HSAs can have telehealth appointments before they meet their deductible. The second provision allows over-the-counter medical products as eligible expenses for HSAs and FSAs without a prescription, something not available before the new law.

In addition, on Dec. 27, 2020, the Consolidated Appropriations Act 2021 was signed into law, which impacted some CARES Act provisions. Under this, taxpayers with FSAs and dependent care flexible spending accounts could roll over funds from 2020 to 2021 and from 2021 to 2022. Employers were also allowed to let their employees make a 2021 mid-year change in their contribution amounts to these types of accounts.

Key Takeaways

  • HSAs and FSAs are both tax-advantaged savings accounts for medical expenses.
  • You must have a high-deductible health plan to contribute to an HSA.
  • HSA funds can carry over from year to year, from employer to employer, and you can withdraw funds after age 65 to use them for non-medical purposes without paying a penalty.
  • FSAs are typically offered by employers, and funds typically don't carry over in full from year to year (though special rules apply for rollovers from 2021 to 2022).
  • If you don't have access to an HSA, and FSA is another good option.

What Expenses Are HSA Eligible?

Qualified medical expenses and some insurance premiums are HSA eligible. Long-term care insurance premiums, COBRA premiums, and health insurance premiums, while you're on unemployment, are all eligible. The IRS considers medical expenses to be the "costs of diagnosis, cure, mitigation, treatment, or prevention of disease." This ranges from menstrual care products and over-the-counter medicine to diagnostic devices, like a blood sugar test kit, hospital services, and psychiatric care.

What Is Covered By an FSA?

FSAs cover the same expenses as HSAs, which are qualified medical expenses and some insurance premiums. Qualified medical expenses include prescriptions, ambulance services, and various types of therapy. Like HSAs, FSAs don't cover care that isn't medically necessary, including cosmetic surgery, gym memberships, maternity clothes, and nutritional supplements.