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FSA vs. HSA: what are the differences?

Written on November 18, 2022 by Sendra Yang, PharmD, MBA. To give you technically accurate, evidence-based information, content published on the Everlywell blog is reviewed by credentialed professionals with expertise in medical and bioscience fields.

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Healthcare costs in the United States continue to rise. Projections on national health expenditures estimate that health spending will approach nearly $6.8 trillion by 2030 [1]. Flexible Spending Accounts (FSA) or Health Savings Accounts (HSA) can support making healthcare costs more affordable. These accounts help by saving you money on medical, dental, vision, and other qualifying medical expenses [2,3]. Though both FSA and HSA have similarities in assisting with health-related costs, there are significant differences.

About FSA and HSA

Flexible Spending Accounts (FSA), also known as Flexible Spending Arrangements, were created by the Internal Revenue Code Section 125 [4]. On the other hand, the HSA was formed as part of the Medicare Prescription Drug, Improvement, & Modernization Act of 2003 [4]. Both an FSA and HSA allow you tax advantages to offset healthcare costs. Each savings account lets you set aside funds pre-tax to help you pay for qualified medical-type expenditures [2]. Typically, if you have an FSA, you cannot have an HSA, though there are some exceptions [2].

In an FSA, you can be reimbursed for certain qualified medical expenses when you pay out-of-pocket. Usually, an FSA is funded by voluntary salary reduction agreements with employers. There are no employment or federal taxes deducted from your contribution. Employers may also contribute to your account [2]. An FSA may provide you with some benefits, such as [2]:

  • Employer contributions can be excluded from your gross income.
  • Deductions from contributions do not include employment or federal income taxes.
  • Reimbursements from paying qualified medical expenses may be tax-free.
  • Even if you do not yet have the funds in an FSA, you can still use the account to pay for qualified medical expenses.

An HSA is a savings account that allows you to pay deductibles, copayments, coinsurance, and other qualified medical expenses through a tax-exempt trust or custodial account set up with a qualified HSA trustee (such as a bank, an insurance company, or IRS approved IRAs) [2]. If allowed, your HSA can also be invested. An HSA may also provide you with some benefits [2]:

  • Contributions from you or someone other than your employer can be claimed as a tax deduction.
  • Employer contributions may be excluded from your gross income.
  • Contributions will remain in your account until used.
  • Interest or other earnings on assets in the account are tax-free.
  • Distributions from paying qualified medical expenses may be tax-free.
  • Even if you change employers or leave the workforce, your HSA stays with you.

Major differences between an FSA and HSA

There are several major differences between an FSA and HSA.

Qualifications

To qualify for an FSA, your employer must establish accounts as part of the benefit packages with traditional health plans. Employers have the flexibility to design and include various combinations of benefits in their programs. If you are self-employed, you do not qualify for an FSA [2].

To be eligible and qualify for an HSA, you must be covered under a high deductible health plan (HDHP), have no other health coverage unless permitted, not be enrolled in Medicare, and not be able to be claimed as a dependent on someone’s tax return [2].

Contributions

You can contribute to your FSA voluntarily by electing an amount to be withheld from your pay by your employer. An employer may also contribute to your FSA if specified in the benefits plan. If you want to change your contribution amount, you can only adjust the amount during open enrollment or with a life-changing event. In 2021, your maximum allowable contribution was $2,750 per year [2]. For 2022, the draft IRS Publication 969 states your maximum permissible contribution as $2,850 per year [5].

In HSA, you can contribute, along with your employer and family members. If you want to change your contribution amount, you can change it any time during the year. The amount you can contribute to your HSA depends on the type of HDHP coverage you have. In 2021, the allowable max for self-only HDHP coverage is up to $3,600 and for a family HDHP coverage is up to $7,200 [2]. For 2022, you can contribute up to $3,650 if you have a self-only HDPD and $7,300 for a family HDHP [2].

Account ownership and rollovers

You usually own HSA accounts and can take them with you if you leave your employer. Any unused HSA balance can be rolled over into the following year [2].

Employers own the FSA, and you will not be able to take the account with you if you leave your employer. For an FSA, any unused funds will be lost unless your employer offers limited rollover or a grace period [2].

Key takeaways for FSA and HSA

FSAs and HSAs offer various benefits, with differences:

  • FSA and HSA offer tax benefits to help you pay for qualified medical expenses.
  • Both FSA and HSA have annual contribution limits.
  • To qualify for an FSA, your employer must establish accounts as part of their benefits packages.
  • To be eligible for HSA, you must be enrolled in an HDHP.
  • If you do not use all your funds in your FSA, you may lose it if your plan has no grace period or rollover feature.
  • You can roll over funds from your HSA year after year.

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References

1. National Health Expenditure Projections 2021-2030 - CMS. Office of the Actuary in the Centers for Medicare & Medicaid Services. URL. Published April 27, 2022. Accessed November 16, 2022.

2. Publication 969 (2021), Health Savings Accounts and other tax-favored health plans. Internal Revenue Service. URL. Published February 7, 2022. Accessed November 16, 2022.

3. Publication 502 (2021), medical and dental expenses: Internal Revenue Service. URL. Published January 13, 2022. Accessed November 16, 2022.

4. Comparison Chart for Health Savings Account, Health Reimbursement Arrangement, Health Care Flexible Spending Account, and Limited Expense Health Care Flexible Spending Account. U.S. Office of Personnel Management. URL. Accessed November 16, 2022.

5. Draft Publication 969 (2022), Health Savings Accounts and other tax-favored health plans. Internal Revenue Service. URL. Published November 2, 2022. Accessed November 16, 2022.

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