What Are the Differences Between an FSA and an HSA?

Managing healthcare costs is a significant concern for many individuals and families. Healthcare savings accounts offer a way to set aside funds specifically for medical expenses, often with tax advantages. Two common types of these accounts are Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). While both aim to help individuals manage healthcare expenditures, they operate under different structures and rules, impacting how funds are contributed, used, and carried over. This article will explore the distinct characteristics of each account.

Flexible Spending Accounts (FSAs) Explained

A Flexible Spending Account (FSA) is an employer-sponsored benefit allowing employees to set aside pre-tax money for eligible healthcare expenses. Employees elect an annual contribution amount, deducted from their paycheck over the plan year. These contributions are not subject to federal income, Social Security, or Medicare taxes, reducing an individual’s taxable income.

FSAs operate under a “use-it-or-lose-it” rule, where any funds not spent by the end of the plan year are forfeited. Employers can offer two exceptions: a grace period of up to 2.5 months to use remaining funds, or a carryover amount. For 2025, employers can allow a carryover of up to $660 into the next year, which does not affect the new year’s maximum contribution limit.

Common eligible expenses for FSA funds include medical, dental, and vision care costs not covered by insurance, such as co-pays, deductibles, prescription medications, and certain over-the-counter items. For 2025, individuals can contribute up to $3,300 to a healthcare FSA.

Health Savings Accounts (HSAs) Explained

A Health Savings Account (HSA) is an individually owned savings account for healthcare costs, offering tax advantages. HSAs are not tied to an employer and remain with the individual even if they change jobs. Eligibility for contributing to an HSA requires enrollment in a High-Deductible Health Plan (HDHP).

For 2025, an HDHP must have a minimum annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. The annual out-of-pocket expenses, which include deductibles, co-payments, and other amounts but exclude premiums, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage. Funds in an HSA roll over year to year and are never forfeited, allowing individuals to accumulate savings over time.

HSAs also offer investment opportunities, allowing funds to grow tax-free. This growth potential supports saving for future medical expenses, including those in retirement. The IRS outlines specific eligible medical expenses for HSA funds.

For 2025, the maximum contribution is $4,300 for individuals with self-only HDHP coverage and $8,550 for those with family HDHP coverage. Individuals aged 55 and older can make an additional “catch-up” contribution of $1,000 annually. HSAs offer a “triple tax advantage”: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free.

Comparing Flexible Spending Accounts and Health Savings Accounts

The ownership of these accounts represents a primary distinction. Flexible Spending Accounts are employer-sponsored benefits. Health Savings Accounts, in contrast, are individually owned.

This difference in ownership directly impacts portability. Funds in an FSA are not portable; if an individual leaves their job, they forfeit any remaining funds unless a grace period or carryover option applies. HSA funds, being individually owned, are always portable and remain with the account holder regardless of employment changes.

Eligibility requirements also differ. Participation in an FSA is contingent on an employer offering the benefit. To contribute to an HSA, an individual must be enrolled in a High-Deductible Health Plan (HDHP).

The rules governing unused funds are another difference. FSAs are subject to a “use-it-or-lose-it” rule, though employers may offer limited exceptions like a grace period or a small carryover amount. HSA funds, however, roll over year after year indefinitely.

Investment opportunities are more common with HSAs. While FSAs are spending accounts with no investment options, many HSAs allow account holders to invest their funds.

Finally, the tax advantages vary between the two. FSA contributions are made with pre-tax dollars, reducing taxable income. HSAs offer a “triple tax advantage”: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.