FSA Vs. HSA: Your Guide To Choosing A Health Care Account

Paying for health care costs can be stressful, but there are two tools that can help ease the financial burden of paying for doctor's visits, dental work, trips to the eye doctor and other medical costs: a health savings account (HSA) and a flexible spending account (FSA).

Comparing an HSA to an FSA can help you decide which of these account types might make the most sense for you. Both allow you to save money that you can use to cover the co-payments you make when you visit a doctor, the cost of your child’s braces, monthly prescription costs and other medical expenses. Both can also lower your yearly income tax.

You usually can’t have both an HSA and an FSA, though, and there are key differences between the account types. So how do you determine whether an HSA or FSA is right for you? Here's a look at the pros and cons of both account types.

What Is An FSA And How Does It Work?

A flexible spending account (FSA) is a tax-deductible employer benefit that allows you to pay for qualified medical expenses with pretax dollars. For health FSAs, you could use the funds to pay for medical expenses not covered by your health insurance, including insurance deductibles, prescription drugs and medical devices.

You can use a debit card provided by your company to cover your copays, which will then be automatically deducted from your FSA. Some companies might require employees to cover medical costs upfront and then file a claim for reimbursement.

An FSA does offer tax benefits. When you deposit money into an FSA, you'll reduce your overall yearly taxable income by whatever amount you contribute. This will in turn reduce your yearly income tax bill. The dollars you deposit in an FSA also aren't taxed when you use them to pay for qualified healthcare expenses.

The downside to an FSA? You can’t roll over most of the money you don’t spend into the next year. If you end the year with a large balance in your FSA, then, you might lose most of that money.

What is An HSA And How Does It Work?

A health savings account (HSA) is another type of spending account that allows you to set aside pretax money and use it to pay copayments or other qualified medical expenses. An HSA will require you to have a high-deductible health plan (HDHP) in order to be able to make contributions.

Many employers offer their own HSA plans. If you work at a company that does, you can sign up for your employer's plan and have the appropriate amount deducted automatically from every paycheck, much like contributing to a 401(k) plan. Like with an FSA, you can either use your HSA debit card to pay for medical expenses or pay out of pocket and be reimbursed.

Any funds that you do not use in your HSA roll over into the next year. The funds in an HSA never expire. You'll also get tax benefits by taking out an HSA, since the money that you deposit in your account is not considered part of your taxable income. This reduces your yearly income for taxes and lowers the amount of taxes you pay on your tax return. HSA dollars are also not taxed when you use them as long as you spend the money on qualified medical expenses. Many HSAs let you invest some of your funds, and any interest your HSA earns through investments is also not taxable.

It's easy to qualify for an HSA, too. You must be covered under a qualifying high-deductible health plan and you must have no other health coverage except for what is allowed by the IRS. You also can't be enrolled in Medicare and can't be claimed as a dependent on someone else's tax return.

Common FSA- And HSA-Eligible Medical Expenses

You can only use the funds in your HSA and FSA for what the IRS defines as qualified medical expenses. Fortunately, there are plenty of expenses that you can cover with the money you’ve saved in these accounts.

Here is a list of some of the most common medical expenses you can cover with your accounts:

• Insurance copayments
• Insurance deductible payments
• Childbirth classes for expectant mothers
• Crutches
• Dental care, including braces, fillings, extractions and cleanings
• Eye exams
• Eye surgery
• Eyeglasses
• Hearing aids
• Flu shots
• Infertility treatments
• Inpatient drug and alcohol treatment
• Occupational therapy
• Physical therapy
• Psychiatrist and psychologist visits
• Speech therapy
• Certain surgeries
• Wheelchairs
• X-rays
• Vasectomies

Be aware that this is just a partial list. It’s best to check with your medical providers or benefits department to make sure that the treatment or medical care you are seeking counts as a qualified medical expense.

Key Differences Between FSAs And HSAs

While an FSA and HSA are very similar in many ways, they also have a few notable differences:

An FSA doesn’t roll over year to year, where an HSA does.

• The maximum annual contribution limit for an HSA is higher. As of 2023, individuals can contribute $3,050 to an FSA, or can contribute up to $3,850 to an HSA.
• FSAs are controlled by your employer, and HSAs are individually controlled.
• Withdrawals are not allowed at all from an FSA, but an HSA allows withdrawals (even though there is a penalty tax when you do withdraw).
• You must have a high-deductible health insurance plan to be eligible for an HSA. You can use an FSA with other types of health insurance plans.

It’s important to be familiar with your options, so when open enrollment comes around next year, you can make an informed decision for yourself and/or your family on what best fits your needs, while also decreasing your taxable income.

Pros And Cons At A Glance

Here's a look at some of the pros and cons of FSAs and HSAs:

Pros And Cons: FSA

If you have regular and defined medical expenses, an FSA might be the right choice for you. Also, if you don't have a high-deductible health plan, you won't be eligible for an HSA and might consider an FSA instead.

Pros And Cons: HSA

HSAs can be great options for young and/or healthy individuals. People with limited health expenses may be better candidates for high-deductible plans, which ties in perfectly with opening an HSA.

How To Choose Between An FSA And An HSA

If you qualify for both an FSA and HSA, which one should you choose? Not surprisingly, that depends on several factors. Here are some questions to ask yourself as you look to make that decision:

• How healthy are you? — To qualify for an HSA, you need to be covered by a high-deductible health insurance plan. While these plans come with lower premiums, they also require you to pay more upfront when you receive medical treatment. An FSA does not have this requirement.
• Do you schedule a lot of doctor’s visits or other treatments? —  If you visit the doctor on a regular basis, or you have family members on your health insurance who do, an FSA might be the better choice. With an FSA, you don’t need to sign up with a high-deductible health insurance plan, like you do with an HSA.
• How much does flexibility matter? — An HSA offers more flexibility since you can contribute more than with an FSA. You'll also be able to rollover any unused HSA money from year to year.
• Do you want to invest some of your funds? —  Only an HSA allows you to invest some of your excess funds. Typically, you need to keep a minimum amount (often $1,000 or $2,000) in your HSA, but you can invest the rest.

FAQs About FSAs And HSAs

What is the main difference between HSA and FSA?

The biggest difference between an HSA and an FSA is that FSAs are employer-controlled accounts, while HSAs are controlled by the individual. This means that, among other things, you can take the funds in your HSA with you when you leave your employer.

Should I do an FSA if I have an HSA?

In most cases, you will not be eligible to contribute to an FSA if you’re already contributing to an HSA. However, you may be able to contribute to a limited-care FSA or a dependent-care FSA even if you have an HSA. Talk to your HR or benefits department if you’re unsure about whether this applies to your situation.

Is HSA and FSA the same thing for tax purposes?

While both HSA and FSA contributions are tax-deductible, they are not quite the same thing for tax purposes. One example of how they differ is in the amount that you can contribute. There are different annual contribution limits for an HSA vs. an FSA.

Can I have an FSA and an HSA?

Generally speaking, you cannot contribute to both an FSA and an HSA. However, there are a few scenarios where you might be able to, depending on the type of FSA that you have. If you have a limited-purpose FSA or a dependent-care FSA, you may be able to contribute to those as well as an HSA.

Does an HSA roll over?

Yes, money in an HSA will roll over at the end of the year, unlike money in an FSA, which is "use it or lose it." If you leave your employer, you will also keep any money that has been contributed to your HSA.

The Bottom Line: The Choice Between An FSA And An HSA Depends On Your Needs

Deciding whether an FSA or HSA is best for you? Consider whether you can afford the higher deductibles that come with the type of insurance plan you’ll be required to have with an HSA. If you’re worried that the insurance deductibles will put too much of a strain on your savings, an FSA might be the wiser choice.

Consider, too, how likely you are to spend all the money you save each year in your account. If you’re worried that you won’t spend it all, an HSA, which allows you to roll your funds over into the next year, might make more sense.

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