The Differences Between an HSA and an FSA: Which Is Better?

Comparing Health Savings Accounts and Flexible Savings Accounts

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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. Here is an overview of everything you need to know to help you understand HSAs versus FSAs.

What Is an HSA?

An HSA is a savings account with tax advantages. If you qualify, you can contribute money on a pre-tax basis, which lowers your tax bill. You can invest the money in your HSA, and any interest you earn also isn't taxed. The money in your HSA can be used to pay for medical expenses like deductibles and copayments.

You can use the funds in an HSA any time, but you can only contribute if you have a qualified High Deductible Health Plan (HDHP). Your deductible is the amount you pay for covered services before your insurance coverage starts. In 2021, the minimum deductible for an HDHP is $1,400 for individual coverage, and $2,800 for family coverage.

HDHPs typically have lower premiums than health insurance plans with lower deductibles. An HSA can help ensure you have the money you need to cover the high deductible, which is why HSAs are tied to HDHPs.

Top Benefits of an HSA

HSAs have several benefits:

  • The funds in your HSA grow tax-free.
  • You don't pay taxes on funds you withdraw to pay for medical expenses. 
  • Your contributions stay in your HSA until you use them.

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 what you withdraw, so an HSA could also be an additional source of retirement funds.

What Is an FSA?

An FSA is an account offered by employers. You can opt to contribute up to the limits set by your employer, and the money you contribute reduces your taxable income. The money in an FSA can be used for medical expenses, and the accounts aren't linked to HDHPs, so they can be used with any health plan. 

One important difference between FSAs and HSAs is that you can't carry over all the funds from year to year if you don't use them. Employers can offer one of two options if you have leftover funds at the end of the year. Either you have another 2.5 months to spend the funds or you can carry over up to $500. FSAs don't work well as a long-term savings strategy.

Top Benefits of an FSA

The primary benefit of an FSA is that it lowers your taxable income. Another benefit is that it can help you manage your health expenses. The money is automatically deducted from your paychecks, so it's there when you need it to pay copays or deductibles or for qualified medical expenses.

With both HSAs and FSAs, you benefit from tax savings because the funds are pre-tax. That means they're deducted from your income before taxes are calculated, reducing how much you pay in taxes.

Qualified Health Expenses

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

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.

FSA or HSA: Which Is Better?

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 purchase an HDHP, though, and not everyone is comfortable with a high-deductible insurance plan.

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

Using the chart below, you can check a variety of advantages and disadvantages of an HSA versus an FSA.

Qualification or Requirements
You must have a qualified High Deductible Health Plan (HDHP) to qualify for an HSA. 
The minimum deductible to qualify in 2020 and 2021 is $1,400 for individual plans or $2,800 for family plans.
You can't be enrolled in Medicare.
You cannot be declared as a dependent on another person's plan.
No requirements, usually offered through a group or employer.
What If You Change Employers? HSAs aren't tied to employment. FSA can not follow you to your new employer, you may lose any amount not spent/used.
Rollover Rules HSA will roll over every year, unused funds can be saved in your HSA long-term. Most FSA funds expire at the end of the year. 
Annual Contribution Limit Caps For 2020, the contribution limit is $3,550 for individual plans and $7,100 for family plans.

For 2021, the contribution limit is $3,600 for individual plans and $7,200 for family plans.
For 2020, the individual FSA contribution limit is $2,750, however, it is up to the employer to allow contribution up to the limit or not.
Flexibility in Changes of Contribution Amount Yes, keeping in mind the annual contribution cap.
Generally, can be changed only:
at open enrollment time.
if you have a change in a family situation.
if you change plan/ employer.
Long-Term Savings Potential Yes. No.
Penalty for Using The Funds
Accumulated savings can be withdrawn in retirement (after age 65) without penalty.
If used for non-medical expenses prior to age 65, must be declared on income tax form and is subject to 20% penalty.
You may have to submit your expenses to be reimbursed by your FSA. Because this is managed by the employer, you may not have access to funds for non-medical reasons. Speak to your FSA administrator or employer for details.
Tax Savings
Money can be contributed pre-tax direct from an employer.
Contributions are tax-deductible.
Grows tax-deferred.
Accumulated savings can be withdrawn tax-free for retirement (after age 65).
Qualified medical expenses are not taxed.

Money can be contributed pre-tax direct from an employer.
Qualified medical expenses are not taxed.
Special Notes HSAs may be accessible in different ways, be sure and ask if you will have a debit card and how expenses work. FSA plans may allow a small carryover or grace period, however, this is at the discretion of the plan administrator or employer and may not apply in many cases.

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, like covering long-term care costs, and not the regular medical expenses being covered by the HSA. 

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, and you can withdraw funds without a penalty at age 65 or older to use them for non-medical purposes.
  • FSAs are typically offered by employers, and funds don't carry over from year to year.