HSA vs. FSA: Which is right for you?

Health savings accounts (HSAs) and flexible spending accounts (FSAs) let you save pre-tax money to help cover qualified health care expenses. They both can be a great way to save for medical costs while getting some tax benefits.

But there are also some key differences between HSAs and FSAs. And your health insurance coverage or employer could dictate which type of savings plan you’re eligible for.

Find out how HSAs and FSAs work and how they’re different.

Key takeaways

• HSAs and FSAs both let you save pre-tax money to pay for qualified health care costs. 
• An eligible high-deductible health plan (HDHP) is required to open and contribute to an HSA.
• FSAs can only be accessed through an employer-offered benefits plan.
• HSAs and FSAs have different contribution limits, enrollment requirements and rollover options. 

Health savings accounts are tax-advantaged savings accounts that let people put away money and use it to cover qualified medical expenses. 

Qualified medical expenses might include things like deductibles, co-pays, prescriptions, dental care and much more. The IRS has a full list of qualified medical expenses you can explore. 

It’s important to know that only people with qualified HDHPs are eligible to contribute to an HSA. So how do you know if your health care coverage qualifies as an HDHP? 

The IRS defines HDHPs as insurance plans that have a deductible of at least $1,400 for one person and $2,800 for a family. Also, an HDHP out-of-pocket maximum can’t exceed $7,050 for an individual or $14,100 for a family.

So if your health care plan meets these two requirements, you may qualify for an HSA. 

There are also limits for how much you can contribute to your HSA per year. In 2022, an individual can contribute a maximum of $3,650 to an HSA, and a family can contribute a maximum of $7,300. You can’t contribute to an HSA if you’re covered by Medicare, but you could still use existing HSA funds to cover some Medicare expenses.

Benefits of an HSA

There can be many benefits to having an HSA:

• No expiration date. Typically, HSA funds don’t have to be used by a certain date. And any unused money can roll over year after year. 
• Employer contributions. Some employers may offer to contribute to an HSA. 
• Tax benefits. HSA contributions are either pre-tax (if you make them through payroll deductions) or tax deductible (if you make them on your own). So HSA contributions can actually lower taxable income. And as long as the funds are used to cover qualified medical costs, withdrawals are tax-free too. 
• Investment. If you have an HSA, you have the option to invest these funds, which could help them grow over time. And any earnings from those investments are tax-free. 
• Portable. If you change jobs or insurance plans, you could still use your HSA funds to cover qualified medical expenses. But keep in mind that if your new plan isn’t an eligible HDHP, you can no longer make HSA contributions.

Drawbacks of an HSA

Here are some potential drawbacks of having an HSA:

• Penalty. If you’re under 65 and use your HSA funds to cover anything besides qualified medical expenses, you could have to pay taxes on that money plus a 20% tax penalty. 
• Fees. Depending on the HSA company, you might be charged monthly fees, transaction fees and overdraft fees. 
• HDHP. You have to be enrolled in an eligible HDHP to open and contribute to an HSA. And that might not be the best health insurance option for everyone. 
• Limits. There are limits for how much you can contribute to an HSA per year.

Flexible spending accounts let you contribute pre-tax money that you can then use to cover qualified medical expenses. If that sounds familiar, it’s because that’s similar to how HSAs work. 

Unlike an HSA, you can only use an FSA if it’s a benefit offered by your employer. But if you’re enrolled in a health insurance marketplace plan, you won’t be able to use an FSA account. Employees can only contribute to their FSAs through payroll deductions. An employer could also contribute to an employee’s FSA. But they aren’t required to do so.

For 2022, FSA contributions are limited to $2,850 per year. If your spouse has an employer-offered FSA, they can also contribute $2,850 per year in a separate FSA. 

Typically, you have to use your FSA funds within the health plan year. But your employer might give you one of two options: 

• A grace period—of up to 2½ months—to use your FSA money. 
• A rollover option to carry over up to $570 of your FSA funds into the next year. 

Your employer can only offer one of these options. And they don’t have to offer either one.

Benefits of an FSA

Some of the benefits of having an FSA might include: 

• Employer contributions. Like an HSA, employers can contribute to your FSA. They might offer to match your FSA contributions. But they don’t have to contribute at all.
• Tax benefits. FSA contributions and withdrawals aren’t taxed—as long as withdrawals are used for qualifying medical expenses. And your contributions can reduce your taxable income, which could help you save on taxes. 
• Spend more than your current balance. You can get reimbursed for eligible expenses even if your current FSA balance won’t cover the cost. You just need to make sure that your total FSA contributions will cover all your expenses by the end of the year.

Drawbacks of an FSA 

Here are some possible drawbacks of an FSA: 

• Expiration. FSA funds generally don’t roll over into the next year. Your employer might give you a grace period to use any remaining FSA funds or let you roll over an amount up to $570. But they don’t have to give you either of those options. 
• Tied to employer. Your FSA is owned by your employer. So if you leave your job, you typically won’t have access to your FSA anymore, even if there’s still money in your account.
• Lower contribution limits. FSAs have lower annual contribution limits than HSAs. 
• Can’t be invested. You can’t invest your FSA funds, which means you can’t grow them over time like you can with HSAs.

One of the main differences between an HSA and an FSA is what kind of health insurance plan you have to have. 

With an HSA, you have to have an HDHP. But HSAs don’t have to be offered through an employer. 

With an FSA, you can open this type of account only if your employer offers it. But you don’t have to be enrolled in an HDHP to open an FSA. 

There are several other important differences between HSAs and FSAs.

You generally can’t make contributions to both an HSA and an FSA in the same year. 

But there is an exception to that rule. You can have an HSA and a limited-purpose FSA at the same time. A limited-purpose FSA can only be used to cover certain expenses for dental care and vision care. 

For example, if a person is eligible for a limited-purpose FSA and needs a lot of dental work, they might consider covering these costs with this type of FSA along with their HSA. Using funds from both accounts could help them cover even more qualified medical costs with pre-tax dollars. 

HSAs and FSAs both give you a way to use pre-tax money to cover qualified health care expenses. Understanding the details about who’s eligible for each account and how they work can help you make a more informed decision when it comes time to shop for health insurance.