HSA vs. FSA: Which Is Better?

Male pediatrician holding stethoscope to child on mother's lap — Photo: fizkes / Getty Images

Depending on the kind of health insurance plan you have and the benefits your employer offers, you might be eligible for a health savings account (HSA) or a flexible spending account (FSA). Taking advantage of these accounts can help you save money and prepare for medical expenses that come up during the year.

HSAs and FSAs have different qualifications and advantages, however. Here's everything you need to better understand HSAs and FSAs before signing up.

Key Takeaways

HSAs and FSAs are both tax-advantaged savings accounts for medical expenses.
You must have a high-deductible health plan to contribute to an HSA.
HSA funds can carry over from year to year and employer to employer, and you can withdraw funds after age 65 to use them for non-medical purposes without paying a penalty.
FSAs are typically offered by employers, and funds typically don't carry over in full from year to year.
If you don't have access to an HSA, an FSA might be an option.

What's the Difference Between an HSA and an FSA?

	HSA	FSA
Qualifications or Requirements	A high-deductible health plan (HDHP) is required. The minimum deductible to qualify is $1,400 for individual plans or $2,800 for family plans. You can't be enrolled in Medicare and you can't be declared a dependent on another person's plan.	No requirements; usually offered through a group or employer.
What if You Change Employers?	Unused money in an HSA stays with you even if you change employers.	FSAs do not follow you to your new employer, so you may lose any money in the account that you don't use.
Rollover Rules	Unused funds in your HSA will roll over every year and can be saved in your account for the long term.	For tax year 2022, you can typically carry $570 into the next plan year or employers may allow an additional two-and-a-half months to spend the previous year's contributions, depending on what the employer allows. In some cases, there are special rules allowing all funds to be carried over if the employer allowed it.
Annual Contribution Limits	For 2022, the annual contribution limits are $3,650 for individual plans and $7,300 for family plans.	For 2022, the individual FSA contribution limit is $2,850. It is up to your employer to allow contributions up to that limit or not.
Changes to Contributions	Yes, as long as contributions are below the annual limit.	Generally, changes can only be made during open enrollment, unless you have a qualifying life event, or you change your plan or employer.
Long-Term Savings Potential	Yes	No
Penalty for Using the Funds	Prior to age 65, funds you use for non-medical expenses must be declared on your tax return, and are subject to a 20% penalty. Accumulated savings can be withdrawn after age 65 in retirement and used without penalty.	Penalties may depend on your employer and FSA. Contact your plan administrator or employer for details.
Tax Savings	Contributions can be made pre-tax directly from your paycheck. Contributions are tax-deductible and grow tax-deferred. Accumulated savings can be withdrawn tax-free after age 65. Funds used for qualified medical expenses are not taxed.	Contributions can be made pre-tax directly from your paycheck. Funds used for qualified medical expenses are not taxed.
Special Notes	HSAs may be accessible in different ways; be sure to ask if you will have a debit card and how expenses and reimbursements work.	FSAs may allow a small carryover or grace period. However, this is at the discretion of the plan administrator or employer, so contact yours for details.

Qualifications or Requirements

To be eligible for a health savings account, you must choose a high-deductible health plan (HDHP). You can't be declared a dependent on someone else's plan and you can't be enrolled in Medicare, either. You can open an account through your employer or on your own, and the minimum deductible for tax year 2022 is $1,400 for individuals and $2,800 for families.

You can only open a flexible spending account through your employer or other group offering it, but there are no additional qualifications or restrictions as there are with an HSA.

Qualified Health Expenses

HSAs and FSAs are meant to cover qualified health expenses. Health insurance premiums typically aren't considered a qualified medical expense by HSAs unless you're paying for certain types of coverage like COBRA or receiving unemployment. You can pay for prescription medications, including insulin, with both types of accounts. Over-the-counter medicine and menstrual care products are also qualified expenses.

You can typically use the accounts to cover copayments and deductibles for doctor visits and hospital stays. Essential dental care is considered a qualified health expense, but teeth whitening isn't. Eyeglasses are also a qualified expense. In general, if it's something you could deduct as a medical expense on your taxes, you can use HSA or FSA funds to pay for it.

Note

You can withdraw funds from an HSA to use for non-medical spending, but you will pay income tax and a 20% penalty until age 65. After age 65, you only pay income tax on amounts you withdraw for non-medical reasons, so an HSA could also be an additional source of retirement funds.

Restrictions

Because both types of plans offer a tax-free way to save for medical expenses, both come with restrictions. However, generally, FSAs are the more restrictive of the two plan types. For instance, you can't transfer your FSA to a new employer when you change jobs and you can only change your contribution during open enrollment or when you have a qualifying life event such as getting married or having a child. These limits don't apply to HSAs.

The biggest difference between the two accounts, though, are contribution limits and how long your money can stay in the account. You can put more into an HSA each year and roll over your leftover balance at the end of the year.

For tax year 2022, the annual contribution limit for an HSA is $3,650 for individuals and $7,300 for families. For an FSA, the tax year 2022 annual contribution limit is $2,850.

With an FSA, your contributions are limited to $2,800. Employers may allow you to carry over up to $570 (in tax year 2022) to the next plan year or allow you a two-and-a-half month grace period to spend the previous year's funds.

Tax Incentives and Savings Potential

Both HSAs and FSAs offer the same tax advantages upfront—you can put money into the accounts and withdraw it to pay medical expenses tax-free. However, HSAs offer far greater tax advantages and savings potential.

Because you can roll over your balance each year, your HSA becomes another savings vehicle within your broader financial portfolio. This money also grows tax-deferred, meaning you won't pay any taxes on the growth until you withdraw the money. However, if you wait to withdraw that money after age 65, during retirement, you can withdraw it tax-free. Because of these features, many people use an HSA as a secondary retirement savings account.

Note

With both HSAs and FSAs, you benefit from tax savings because the funds you deposit are pre-tax. That means they're deducted from your income before taxes are taken out. This reduces the amount of your taxable income.

Which Is Right for You?

Overall, HSAs are more flexible. You pre-tax contributions lower your tax bill, and you can use an HSA to save money. Also, you can roll over unused money. You do have to have an HDHP, though, and not everyone is comfortable with a high-deductible insurance plan.

An FSA doesn't build up over time, and you can lose leftover funds at the end of the year. You also stand to lose your FSA if you change employers. An FSA offers tax savings and budgeting for medical expenses, so if you don't qualify for an HSA, an FSA may be an alternative.

Impact of the CARES Act on FSAs and HSAs

One crucial change applied to telehealth appointments. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, patients with high-deductible health plans paired with HSAs can have telehealth appointments before they meet their deductible. The second provision allows over-the-counter medical products as eligible expenses for HSAs and FSAs without a prescription, something not available before the new law.

On December 27, 2020, the Consolidated Appropriations Act 2021 was signed into law, which impacted some CARES Act provisions. Under this, taxpayers with FSAs and dependent care flexible spending accounts could roll over funds from 2020 to 2021 and from 2021 to tax year 2022.

Frequently Asked Questions (FAQs)

What expenses are HSA eligible?

Qualified medical expenses and some insurance premiums are HSA-eligible. Long-term care insurance premiums, COBRA premiums, and health insurance premiums while you're on unemployment, are all eligible. The IRS considers medical expenses to be the "costs of diagnosis, cure, mitigation, treatment, or prevention of disease."

What Is covered by an FSA?

FSAs cover the same expenses as HSAs, which are qualified medical expenses and some insurance premiums. Qualified medical expenses include prescriptions, ambulance services, and various types of therapy. Like HSAs, FSAs don't cover care that isn't medically necessary, including cosmetic surgery, gym memberships, maternity clothes, or nutritional supplements.

Can you have an HSA and an FSA at the same time?

You can only have an HSA and an FSA at the same time if the FSA is designated as a limited-purpose FSA. These FSAs must have a specified purpose, such as covering long-term care costs rather than the regular medical expenses being covered by the HSA.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

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