FSA vs. HSA: What’s the Difference Between Them?

Managing healthcare costs often involves various savings vehicles. Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) serve a similar purpose but have distinct rules and advantages. Understanding their differences is important for informed decisions about managing medical expenses. This article clarifies the nature and mechanics of both FSAs and HSAs.

Understanding Flexible Spending Accounts (FSAs)

A Flexible Spending Account is an employer-sponsored benefit that allows individuals to set aside pre-tax money for eligible healthcare expenses. Employees typically contribute to an FSA through payroll deductions, which reduces their taxable income. The employer owns the account, with funds allocated for the employee’s use.

A defining characteristic of an FSA is the “use-it-or-lose-it” rule, requiring funds to be spent within the plan year or they are forfeited. Employers may offer exceptions, such as a grace period (up to two and a half months) or a limited carryover (e.g., $660 for 2025). An employer can offer either the grace period or the carryover, but not both.

Eligible expenses for an FSA are broad, encompassing medical, dental, and vision care costs. These include deductibles, copayments, prescription medications, and often over-the-counter medicines and supplies. The IRS defines eligible medical expenses in Publication 502. Funds in an FSA are typically not portable; if an individual leaves their employer, unused funds are generally forfeited.

Understanding Health Savings Accounts (HSAs)

A Health Savings Account is a tax-advantaged savings account specifically designed for healthcare expenses, owned by the individual. A strict eligibility requirement for opening and contributing to an HSA is enrollment in a High-Deductible Health Plan (HDHP). These plans typically feature lower monthly premiums but require individuals to cover a larger portion of their medical costs before insurance coverage begins.

Contributions to an HSA can be made by the individual, their employer, or both. These contributions are tax-deductible, or if made through payroll deductions, they are pre-tax, which lowers taxable income. HSAs offer a “triple tax advantage”: contributions are tax-deductible, the funds grow tax-free through investments, and withdrawals for qualified medical expenses are also tax-free. This allows the money to accumulate over time without being subject to taxes on earnings.

Funds roll over year to year and remain with the individual, making them fully portable, even if they change jobs or health plans. The funds can be invested, offering potential for long-term growth, similar to a retirement account. After age 65, individuals can withdraw HSA funds for non-medical expenses without penalty, though these withdrawals become subject to ordinary income tax.

Key Distinctions and Overlap

While both FSAs and HSAs offer tax advantages for healthcare expenses, their operational structures and benefits differ significantly. Eligibility is a primary distinction: an HSA requires enrollment in a High-Deductible Health Plan (HDHP), while an FSA is typically offered through an employer and can be paired with any health plan. This HDHP prerequisite means not everyone qualifies for an HSA.

Ownership and portability also set these accounts apart. An HSA is owned by the individual, making it portable and allowing funds to move with them from job to job or into retirement. Conversely, an FSA is employer-owned, and generally, unused funds are not portable if an employee leaves their job.

The rollover rules present another clear contrast. HSA funds roll over year after year without limit, allowing for long-term savings accumulation. FSAs, however, are subject to a “use-it-or-lose-it” rule, with only limited grace periods or carryover amounts permitted at the employer’s discretion.

Investment potential is a distinct advantage of HSAs. Funds within an HSA can be invested in various options, allowing for tax-free growth over time, which positions them as a potential retirement savings vehicle. FSAs do not offer an investment component; they function as short-term spending accounts for immediate healthcare needs.

Both accounts provide tax benefits on contributions. HSAs offer a “triple tax advantage” with tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. FSA contributions are also made with pre-tax dollars, but their tax benefits do not extend to investment growth.

Both account types have annual contribution limits set by the IRS. For 2025, the HSA contribution limit for self-only coverage is $4,300, and for family coverage, it is $8,550, with an additional catch-up contribution for those aged 55 and over. The FSA contribution limit for 2025 is $3,300.

Despite their differences, both FSAs and HSAs cover a wide range of qualified medical expenses, including deductibles, copayments, and prescription drugs, as defined by IRS Publication 502. In some cases, a limited-purpose FSA, which covers only vision and dental expenses, can be used in conjunction with an HSA.