FSA vs. HSA: What’s the Difference and Which Is Right for You?

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Flexible spending accounts (FSA) and health savings accounts (HSA) let you save pretax money to spend later on medical and healthcare expenses that aren’t covered by your insurance plan. Both offer tax incentives for saving money on healthcare, but that’s where the similarities end.

You can’t contribute to an FSA and an HSA simultaneously. So, when it’s time for open enrollment, you need to choose the account that will best help you manage rising healthcare costs.

How FSAs and HSAs Compare

Here’s a look at the differences between FSAs and HSAs:

Flexible Spending Account Basics

A flexible spending account allows you to save money to put toward out-of-pocket healthcare costs.

What Is an FSA?

An FSA account is sponsored by an employer to help employees pay for healthcare. You contribute pretax money, and your employer can contribute money as well. Whenever you incur a qualified medical expense, you submit a claim to your employer and your employer reimburses you from your FSA balance. The reimbursement is tax-free for qualified medical expenses.

Your employer can offer one or more of the different types of FSA accounts. Each covers different things.

• Health FSA: Standard FSA for all qualified medical expenses
• Limited-purpose FSA: Dental and vision care, and out-of-pocket preventative care
• Dependent-care FSA: Child day care and adult day care needed to allow you to work or attend school full-time

With a health FSA, you can have up to $3,300 taken out of your paycheck to pay for medical expenses for yourself, your spouse or your dependents over the course of a year.

Employees can contribute to their own FSA accounts, but the IRS also allows employers to make contributions on a worker’s behalf. The combined limit for your and your employer’s contributions is $3,300. If you don’t use all of the money in the account by the end of the plan year, you forfeit any remaining balance.

The Use-It-or-Lose-It-Rule

The IRS allows companies to choose one of two types of exceptions to this use-it-or-lose-it rule. The first is a grace period that gives you up to two months and 15 days after the end of your plan year to use your remaining funds. The second is a carryover that allows employees to roll over up to $660 of the remaining balance in the account. This money can be used in the following plan year to pay for medical expenses.

Employers are allowed to offer one of these two options, but not both. Employers are not required to offer either option.

What Is FSA Eligible?

Qualified medical expenses eligible for reimbursement from an FSA are the same expenses that qualify for medical and dental deductions on a tax return. The list is lengthy and explained in detail in IRS Publication 502, but the following are some common tax deductions that are also qualified FSA medical expenses:

• Birth control
• Chiropractic care
• Dental treatment
• Eyeglasses
• Feminine hygiene products
• Lab fees
• Medicines
• Psychiatric care
• Weight-loss programs to treat a specific diagnosed disease
• X-rays

These are also considered qualified medical expenses for HSAs.

Common exclusions from coverage include childcare, cosmetic surgery, maternity clothes, veterinary fees and weight-loss programs not prescribed to treat a specific diagnosed disease.

You can use the FSA for your own expenses as well as your spouses’ and those of dependents you claim on your tax return. In some cases, expenses from dependents you can claim on your tax return but won’t are also eligible.

Pros and Cons of an FSA

Weigh the pros and cons of an FSA before deciding whether to enroll — or, if you receive employer contributions, contribute your own money.

Pros

• Contributions are based on pretax money, so your taxable income will be lower.
• You can save for medical expenses, including many over-the-counter products, you think you might have during the year.
• The full annual contribution amount is available to use immediately after you contribute it.
• You can use the account to pay for out-of-network providers and alternative healthcare.
• Money is taken directly out of your paycheck, making it easy and convenient to save.

Cons 

• Health FSAs have a relatively low maximum annual contribution amount — just $3,300 for 2025.
• You can lose the money if you miscalculate your future expenses.
• You’ll have to pay many expenses out-of-pocket, then file claims for reimbursement.
• You forfeit funds you don’t use by the end of the plan year, or before the end of any grace period your employer offers.
• FSAs are available only through an employer.
• When you separate from an employer, you also leave the FSA account behind.

Health Savings Account Basics

Health savings accounts offers a triple-tax-advantage way for people with eligible high-deductible health insurance plans (HDHP).

• Tax-deductible contributions: You’ll contribute pretax money
• Tax-free growth: Savings will grow tax-free
• Tax-free withdrawals: Qualified medical expenses can be withdrawn tax-free

The difference between an HSA and an FSA is that you can pay for your expenses yourself with a debit card. You can keep the funds to use after you change jobs and after you retire. Plus, there are no penalties on non-medical withdrawals after you turn 65.

Other things to note about HSAs:

• HDHP required: You must have an HDHP, with deductibles of at least $1,650 for an individual or $2,300 for a family
• IRS contribution limit: $4,300 for individuals and $8,550 for families
• Qualified medical expenses: The qualified medical expenses are the same as FSAs.
• Investment potential: Your HSA funds can be invested and the growth is tax-free.

Pros and Cons of an HSA

Weigh the pros and cons of an HSA before deciding whether to enroll.

Pros

• Contribution limits are higher than for FSAs.
• Easy to use, especially with a provided debit card
• No need to guess what medical expenses will be next year
• The money is yours after you change jobs.
• The contributions are tax-deductible, grow-tax free and can be withdrawn tax-free for qualified medical expenses.

Cons

• Must have a high-deductible health plan to contribute to an HSA
• It’s probably not the best choice for people with chronic or expensive medical conditions who can save money with a health plan that has a lower deductible.
• You must pay taxes on any money you take out of your HSA for nonmedical expenses — regular income tax, plus 20% if you’re under age 65.

FSA vs. HSA: The Differences and Similarities

FSAs and HSAs both give you tax-advantaged ways to save for medical expenses your insurance doesn’t cover. But they differ in important ways.

Employer-Sponsored vs. Employee-Controlled

• FSA: Employer-sponsored and stays with the employer if you change jobs
• HSA: Employee-owned and controlled. Employees keep the accounts if they leave the employer. You must have an eligible high-deductible health plan.

Use-It-or-Lose-It vs. Rollovers

• FSA: Operates under the use-it-or-lose it rule, unless your employer offers a grace period or allows rollovers.
• HSA: No use-it-or-lose it rule — funds roll over year to year and stays in the account until it’s withdrawn.

Contributions and Investment Potential

• FSA: Contributions are capped at $3,300 and must follow your employer’s set schedule. The funds must be spent or forfeited.
• HSA: Contribute up to $4,300 for individual plans or $8,550 for family plan or invest, whenever you want.

FSA vs. HSA: Which Is Better for You?

Young, healthy people who don’t expect to need much healthcare beyond preventative care are often better off with the HSA if they can afford to contribute to the account. The high deductible is less of a concern in that case, so you can simply enjoy the tax benefits of the HSA and leave your money to grow until you need it.

An FSA might be the better choice if you anticipate needing a lot of medical care and want to keep your insurance deductible low.

Smart Healthcare Savings: Use What Works Best for You

Remember that a high-deductible healthcare plan typically offers lower premiums but comes with higher out-of-pocket costs, at least until you meet your deductible. If you have an FSA and don’t spend the full amount, you’ll have to forfeit any unused balance.

Both plans include a lot of fine print, so make sure you read plan documents. If you still have questions, talk to someone in your human resources or benefits department. You might also want to consult with a tax advisor for advice about how to use your account and take advantage of any tax savings.

Barri Segal contributed to the reporting for this article.

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