HSA vs FSA: What’s the Difference Between an FSA and HSA?

Written by Meagan DrewUpdated: 29th Sep 2021
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Health Savings Accounts and Flexible Savings Accounts have a lot in common, but they are not the same.

Both HSAs and FSAs are government-regulated because the accounts allow for tax-free spending on qualified medical expenses, but the similarities end there.

HSA vs FSA Fast Facts & Key Takeaways

  • Both are tax-advantaged savings accounts to be used for qualified medical expenses
  • Both have contribution limits
  • FSAs are employer-owned, and HSAs are individually owned
  • FSA funds are forfeited if not uses. HSA funds roll over from year to year.
  • FSAs reimburse employees for expense, HSAs provide checks and debit cards to individuals

What Are Health Savings Accounts (HSAs)?

A Health Savings Account (HSA) is a savings account owned by an individual available to anyone enrolled in a high-deductible health insurance plan or HDHP that allows for tax-free spending on qualified medical expenses. Some HSAs allow for funds to be invested through the use of an HSA custodian.

What Are Flexible Spending Accounts (FSAs)?

Flexible Spending Accounts or FSAs are employer-sponsored and owned plans that offer employees tax-free spending on qualified medical expenses.

HSA vs FSA: Differences Between FSA and HSA

The primary difference between FSAs and HSAs lies in ownership. Flexible Spending Accounts are owned by the employer who sponsors the plan.

Health Savings Accounts are owned by the individual. Why this matter has a lot to do with what happens to unused dollars.

HSA account holders can roll unused funds over from year to year, whereas unused funds in an FSA have to be forfeited to the employer at the end of every year or grace period.

HSA vs FSA: The Differences the Matter

Details:
Qualification or Eligibility:Offered through Employer Only Must be participating in a High Deductible Health Plan or HDHP and have no supplemental insurance. HSA owners cannot be eligible for Medicare and cannot be declared as a dependent on someone else’s tax return.
Contribution Limit:$2750 per employee, but employers can set any contribution limit up to $2750$3600 for individual plans $7200 for family plans
Account Ownership:EmployerIndividual/Employees
Rollover Rules & Guidelines:Employers can offer a grace period of an additional 2.5 months at the end of the year for employees to use all funds or they may allow $500 to be carried forward into the next year, but not both. Any funds that have not been used by the end of the year or grace period are forfeited to the employer. Unused funds are rolled over from year to year.
Penalty for Withdrawing Funds:It is employer-dependent, but because the account is employer-owned, employees may not have access to funds for non-medical expenses. Money invested can be taken out at any time for any reason after the age of 65. Money pulled out before the age of 65 for non-qualified medical expenses is subjected to both a 20% penalty and taxes.
Tax Savings: Contributions, growth, and distributions are all tax-free. Contributions, growth, and distributions are all tax-free.
Changing Your Contributions: Only changed during open enrollment.Changed at any time and for any reason.

Eligibility Details Explained

Anyone who has an employer offering an FSA is eligible to participate even if they are not enrolled in an employer-sponsored health insurance plan.

FSAs are employer-sponsored and owned, though, so if an employee terminates their employment, the FSA funds are subject to forfeit to the employer.

Eligibility for participation in an HSA is considerably more complicated. The main eligibility requirement for HSA participants is that they are enrolled in an HDHP or High Deductible Health Plan.

The minimum deductible required by the HDHP to qualify is $1400 per individual or $2800 per family.

In addition, to be eligible for an HSA, individuals must not have any supplemental insurance or be eligible for Medicare. Finally, HSA owners may not be listed as a dependent on anyone’s tax return.

FSA vs HSA: Qualifications to Set Up an Account

Qualifications to Set Up an FSA

FSAs are only set up by employers. Self-employed and unemployed individuals are disqualified from FSA eligibility.

FSAs are available to any employee in the company regardless of whether or not their health insurance is through the company.

Qualifications to Set Up an HSA

HSAs are available to all individuals- self-employed, unemployed, employed. Some companies that offer HDHPs as their health plan do offer HSAs through their company, but the individual retains full ownership of their plan regardless of who sponsors the plan.

Can You Have an HSA and FSA at the Same Time?

You likely cannot have both an HSA and an FSA at the same time. Because the qualifications to set up an HSA are so stringent, there is not an ability to double up on tax-free qualified medical expenses spending by having both an HSA and FSA.

There is one caveat to this general rule. Some FSAs are considered “limited purpose” and only provide coverage for vision and dental. In that instance, you can have both.

HSA vs FSA Frequently Asked Questions

What Do HSAs and FSAs Cover? Qualified Health Expenses

We know that HSAs and FSAs alike cover qualified health expenses, but what exactly are qualified health expenses? The simple answer is, well, a lot.

HSAs and FSAs can both be used to pay certain health, dental, and vision expenses. Premiums for health care plans cannot be paid, but co-payments and deductibles can be paid with both.

HSAs and FSAs both pay for medical equipment, and thanks to the CARES Act of 2020, menstrual care products and over-the-counter medications are now covered too.

FSAs and HSAs generally cover expenses that many health insurance plans do not, like yoga classes (which medical diagnoses), acupuncture, and chiropractor visits.

For those who would otherwise be paying out of pocket for these services, using an FSA or HSA to offset costs in a tax-free way would certainly be advantageous.

For a full list of qualified medical expenses covered by Health Savings Plans and Flexible Spending Plans, the IRS details them all in Publication 502.

Is FSA or HSA Better?

The decision about whether an FSA or an HSA is better depends on which you qualify for as you will likely not qualify for both.

For individuals who are in an HDHP, an HSA is without a doubt a better choice as, despite what the name implies, it is considerably more flexible than the HSA. FSAs generally fall into the category of better than nothing.

It’s imperative for anyone participating in an FSA to carefully determine how much they would like to contribute since overages are forfeited, and changes to contributions are only allowed one time a year.

Bottom Line: What’s the Difference Between an FSA and HSA?

Health Savings Accounts are owned by individuals and offer anyone eligible to participate ultimate flexibility in tax-free spending for qualified medical expenses.

Flexible Savings Accounts are owned by employers, and while they do offer tax-free spending on qualified medical expenses, they are “use it or lose it”, and FSA participants can lose any money they didn’t spend by the end of the year.

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Meagan Drew
Meagan Drew

Meagan Drew is a Senior Personal Finance Writer & Product Analyst with 7 years experience in wealth management. As a former Series 7 and 63 certified advisor, Meagan specializes in making financial topics relatable and consumable, no matter the reader’s experience level. She attended the United States Military Academy at West Point where she studied Nuclear Engineering. Meagan is a veteran, military spouse, and mom of 4 currently living in Colorado Springs. Her areas of expertise are military personal finance, credit cards, personal loans, investing, and wealth management.