HSA vs. FSA: The difference and how to choose

The most notable difference between a flexible spending account and a health savings account is that an FSA is owned by the participant’s employer and an HSA is, in practice, controlled by you.

This means that with an HSA, you have more flexibility to roll over contributions. For example, if you leave your job, your FSA contributions may be forfeited, while an HSA typically permits you to keep the contributions you’ve made to the account and transfer them to a new HSA.

What is an FSA?

An FSA is a savings account you can contribute to automatically from your paycheck. One significant benefit of this account: The funds are deducted from your check before the money is taxed. Money in an FSA can be used to cover certain out-of-pocket healthcare costs.

What is an HSA?

An HSA is similar to a personal savings account, although the money paid into the HSA is earmarked for paying health care expenses. You’re the owner of an HSA account — unlike an FSA, which your employer owns. This gives you more control of the funds compared with an FSA. Like an FSA, a benefit of an HSA is the funds deposited into the account are not taxed.

The table below compares FSAs and HSAs based on 2022 requirements and restrictions.

It’s also worth noting that you likely won’t be able to have both types of accounts unless your FSA is a “limited purpose” FSA. Eligibility varies on a case-by-case basis, so speak to your employer.

If you’re eligible for either an FSA or an HSA, you should take full advantage of each plan’s perks. The main benefit is that you can save on taxes by putting part of your pay toward one of these tax-advantaged accounts.

Should you choose an FSA or HSA?

Remember that flexibility is a key feature of an HSA. In general, you can contribute more to an HSA each year and may roll over any unused balance at year’s end. So, if you’re looking for greater flexibility coupled with tax-free benefits and portability, an HSA may be the best option.

However, there is a trade-off for these HSA advantages. To participate in an HSA, you’ll need to sign up for a high-deductible health care plan, which typically generates larger out-of-pocket health care costs, along with the higher deductible.

While an HDHP may be the right choice for younger and healthier people, or those with higher incomes and savings, this may not be best for everyone. For older people on fixed incomes or those with chronic or frequent health issues, a more predictable and less expensive (though less flexible) FSA might be the right choice.

A human resources or health care insurance professional may be able to explain your options regarding employer contributions, deductibles and copays. They can help you understand the benefits available to you from an HSA or FSA.

What’s considered a qualified medical expense?

You can use your FSA and HSA pretax/tax-deductible funds toward thousands of eligible purchases, but before spending, check whether it’s an approved expense.

A good rule of thumb as to whether it’s a qualified expense is if you can consider it a medical need. The IRS tax code refers to the term “medical care” as “payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body.”

Some of your everyday expenses may be eligible. To check, browse the FSA store eligibility list.

Here’s a broad look at some popular expenses that typically qualify:

• Medical copayments and coinsurance
• Dental care costs (i.e., dentures)
• Vision care costs (i.e. eye examination, eyeglasses)
• Prescription medications and over-the-counter treatments

Additionally, HSA funds can be used toward post-tax insurance premiums such as COBRA and other long-term care premiums.

Expenses that typically do not qualify as eligible medical expenses include:

• Cosmetics or cosmetic surgery
• Exercise equipment
• Household help
• Funeral expenses
• Fitness programs (such as gym memberships)

How much should you contribute?

Once you’ve decided on an account, setting your contribution is next.

Consider the rollover rules for each type of account. FSA funds are use-it-or-lose-it, whereas funds in HSAs can roll over into the next year.

If you choose an HSA, consider contributing the maximum amount yearly due to its flexibility.

“Unlike the FSA, where you must exhaust your contributions annually, the HSA money can be invested to grow and compound. This is similar to a traditional IRA,” says Barbara A. Friedberg, a financial consultant and owner of investment management platform Robo-Advisor Pros.

If you can invest your HSA contributions, you may grow them tax-free, ultimately leading to a larger HSA balance.

If your HSA account still has a balance when you reach age 65, you can withdraw the money penalty-free, use it toward anything and only pay income tax. It’s a nice bonus to your retirement savings strategy, says Friedberg.

As for FSA contributions, Lauren Anastasio, director of financial advice with investing app Stash, suggests that you think of it as a strategic spending account.

“While there is a small amount that may be eligible to roll over each year, an FSA should only be funded with the amount you expect to spend during the plan year,” says Anastasio. “If you consistently hit your deductible or have a planned medical expense like surgery or pregnancy, funding your FSA with the amount to cover your deductible would be a great start.”

Bottom line

Flexible spending accounts and health savings accounts are both solid options if you’re eligible. By contributing to these tax-advantaged accounts, you could lower your income taxes while also having funds available for important health expenses.

— Bankrate’s Karen Bennett contributed to an update of this story.