The Differences Between HSA and FSA: Which Is Better?

Health Savings Account vs Flexible Spending Account

Depending on the kind of health insurance plan you have, you might be eligible for an HSA or an FSA account. Taking advantage of these kinds of 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 the basics of HSA vs. FSA so that you can choose the best plan for you.

Health Savings Account (HSA)

An HSA is a savings account with tax advantages that can be used in combination with a High Deductible Health Plan. The funds in the HSA account are accumulated in order to be used for eligible medical expenses by the account holder. Health Savings Accounts have to be tied to High Deductible Health Plans (HDHP), they are not available if you are not enrolled in a qualified high deductible health plan. 

Qualified HDHPs Give You Access to Savings Options Through HSAs

An HDHP may make you uncomfortable if you are worried about coming up with money to cover the deductible and out of pocket expenses, but when you look at the key benefits you can take advantage of when you have a high deductible health plan and an HSA, it makes a lot of sense and puts you at an advantage. Two key elements are:

If you build money into your HSA over a couple of years and have not had high medical expenses, you will save enough to compensate for the HDHP and save more money on your health plan overall.

Benefits That Make HSAs a Really Good Idea

Although HSAs have several benefits, as outlined in the comparison chart below, some key features are:

  • Any money you invest in your HSA can grow tax-free and if you do not spend it on medical costs, then you can keep accumulating these savings for retirement. 
  • Withdrawing money from an HSA to pay qualified medical expenses is tax-free. 
  • Earnings in HSAs are not taxed
  • If you don't have high medical or out of pocket medical expenses now, you aren't wasting or losing your money, the money builds up over time, so if all of a sudden you do need access to medical funds, you aren't limited to the yearly contribution, the money in the HSA will build over time.

Flexible Spending Account or Flexible Spending Arrangement (FSA)

Flexible Spending Arrangements, also called Flexible Spending Accounts, can be used for medical expenses and are not linked to HDHPs, so they can be used with any health plans and are usually offered by an employer as part of a benefits package. 

FSA Money Expires at the End of the Year—No Long-Term Savings Potential

You benefit from tax savings of the money you put in your FSA, the problem is, you won't be able to keep any funds left in it at the end of the year if you haven't used them. FSAs do not work well as a long-term savings strategy.*

Saving on Your Taxes With HSA or FSA

With HSAs and FSAs you benefit from tax savings because you can have your money put into your account by your employer or administrator "pre-tax." 

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 (LPFSA)." LPFSAs must have a specified purpose, for example when the LPFSA is designated to cover dental and vision costs, and not the regular medical expenses being covered by the HSA. 

Qualified HSA and FSA Expenses

HSAs and FSAs are meant to cover qualified health expenses. Some examples of how people may use their funds may include copayments, deductibles, some drugs, as well as many other qualified health care costs. Qualified expenses can be seen in Publication 969Health Savings Accounts and Other Tax-Favored Health Plans. Your plan administrator or employer may be able to help you understand the qualified expenses for your health plan.

An HSA or FSA: Which Is Better?

Overall an HSA is more flexible, allows you to save money by paying fewer taxes, but also allows 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.

The FSA does not build over time, you lose any amount you put into it at the end of the year, so it is not a long-term savings tool. You also stand to lose your FSA if you change employer, but it still provides the tax savings, so if you don't qualify for an HSA, and you don't have an HDHP the FSA is a good option.

Using the chart below, you can check a variety of different advantages or disadvantages of the HSA vs. FSA.

Qualification or Requirements

You must have a qualified High Deductible Health Plan or HDHP to qualify for an HSA. 

The minimum deductible to qualify in 2020 is $1,400 for individual plans or $2,800 for family plans.

You can not 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? Your HSA can follow you. 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. FSA funds will expire at the end of the year. You can not save them.*See Special Notes
Annual Contribution Limit Caps For 2020, the contribution limit for qualifying medical plans* is $3,550 for individual plans and $7,100 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 None
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 percent 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 can be 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.

Article Sources

  1. “Health Savings Account (HSA).” Accessed July 29, 2020.

  2. “High Deductible Health Plan (HDHP).” Accessed July 29, 2020.

  3. IRS. “Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans,” Pages 2-3. Accessed July 29, 2020.

  4. ”Using a Flexible Spending Account (FSA).” Accessed July 29, 2020.

  5. IRS. “Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans,” Page 18. Accessed July 29, 2020.

  6. IRS. “Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans,” Page 5. Accessed July 29, 2020.