HSA vs. FSA Breakdown

An HSA stands for Health Savings Account. It’s considered a savings account with tax benefits. You can put pre-taxed money into your HSA, lower your tax bill, and even earn interest on your HSA funds. 

An FSA stands for Flexible Spending Account. An FSA is through your employer, and they set the limits for how much you can contribute to the account. The amount of funds you put into the spending account can help reduce your taxable income. 

Both an HSA and FSA allow you to put money into the accounts to help you pay for medical expenses and offer you a tax advantage. With an FSA, your employer may contribute to the account, but it’s not a given.

What is an HSA or FSA Card?

An HSA card is a debit card that allows you to access funds in your Health Savings Account. You must use your card on eligible expenses. Non-eligible purchases are subject to a 20% penalty, and you’ll have to claim them on your income taxes. 

An FSA card is a debit card that allows you to access funds in your Flexible Spending Account. The funds are meant to pay for eligible medical expenses. The FSA card has a “use-it-or-lose-it” policy. This means, if you don’t use up your FSA funds before the end of the year, you’ll lose them. However, some employers have a grace period that gives you a little extra time to get spending. 

There are several differences between an HSA and FSA, including ownership, eligibility, benefits, and limitations. One of the main differences is an HSA is owned by the individual (you!), while an FSA is managed by the employer. 

Overall, an HSA tends to have more flexibility and higher contribution limits. It also grants rollover if you don’t use all of your funds by the end of the year. But, to have an HSA, you must be enrolled in a high-deductible health care plan (HDHP). Some employees avoid high-deductible plans because of the potential for some high out-of-pocket expenses. 

Check out the HSA and FSA comparison chart below to get more details on how these options differ.

It’s also important to note if you leave your employer, you must give up your FSA. The only exception is if you’re eligible to continue it through Continuation of Health Coverage (COBRA).  

HSA vs. FSA qualifications

In order to access the benefits of HSAs and FSAs, you must meet a certain set of qualifications. 

For an HSA, you must: 

• Have a high-deductible health plan (HDHP)
• Not be enrolled in other health care plans (unless permitted by the IRS) 
• Not be enrolled in Medicare
• Not be listed as a dependent on someone else’s tax return 

For an FSA, you must:

• Be employed by an employer who offers the benefit
• Not be self-employed 

One of the major differences between HSA and FSA requirements is you don’t need to be part of an HDHP to have an FSA if it’s offered by your employer.

There are several unique benefits of HSAs and FSAs. There are also potential drawbacks when deciding which one is right for you. 

The pros of an HSA include: 

• You can claim a tax deduction for contributions to the HSA.
• Employer contributions don’t need to count toward your gross income. 
• Contributions stay in your account until used. 
• Interest and earnings on account assets are tax-free. 
• Distributions might be tax-free when you pay for qualifying medical expenses. 
• You can keep your HSA if you change employers. 

The cons of an HSA are the requirements, particularly that you must be enrolled in an HDHP. You also have to plan ahead, and for many, it can be difficult to set aside funds just for the HSA. It is hard to predict illnesses, injuries, and other healthcare issues, so you may not have time to fund your account before you need the money. 

The pros of an FSA include: 

• Employer contributions don’t need to count toward your gross income. 
• Employment and federal income taxes aren’t deducted from the contributions. 
• If you pay qualified medical expenses, reimbursements could be tax-free.
• You can pay for qualified medical expenses using the FSA, even if you haven’t put funds in the account yet.

One of the biggest cons of an FSA is that it’s tied to your employer. So, if you change jobs, you’ll lose the FSA. You must also use the money in your FSA by the end of the year. Contribution limits must also be considered when funding an FSA. 

HSAs and FSAs both help you pay for certain medical, dental, and vision costs. Both an HSA and an FSA cover you, your spouse, your children, and other eligible dependents.

The list of HSA- and FSA-eligible costs varies. It can include dental work, eye exams, prescription medications, surgery, glass, chiropractic care, and more. Penalties may apply for non-qualifying expenses. 

If you use your HSA on non-qualifying purchases, you’ll face penalties and have to pay taxes on them. If you use your FSA on non-qualifying purchases, you must pay the amount back or risk your FSA card being deactivated. In some cases, you may be able to use other FSA reimbursements to pay off your outstanding balance. 

Whether you should get an HSA or FSA depends on what’s important to you and your eligibility. Look at the differences between an FSA and HSA, and figure out which one best addresses your financial needs and goals. 

Eligibility can also be a determining factor. If you are self-employed or unemployed, an FSA isn’t an option for you. If you aren’t on a high-deductible plan, an HSA isn’t an option for you. If you’re thinking about switching to an HDHP, make sure you consider the out-of-pocket expenses. If you’re not confident this type of health insurance plan matches your financial situation, an FSA might be the way to go. 

Oftentimes, you can speak with your employer to discuss specific benefits. They may also be able to offer some guidance on what looks like the best choice for you. 

There are benefits to both an HSA and FSA. Ultimately, the first deciding factor is eligibility. Once you figure out which one you’re eligible for, weigh the pros and cons of each. Determine what’s going to be the most helpful to you when tackling your health care costs and other financial goals. 

Find out more about HSAs.

If you still have lingering questions about an FSA vs. an HSA, keep reading for some additional insight.