HSA vs. FSA: What’s the Difference?

Which would you rather improve, your health or your wealth? That’s easy. Both, of course! So, what if there was such a thing as tax-advantaged accounts that save you money and help you cover health care costs? That would be awesome! And the good news is, they’re real.

They’re called Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). HSAs and FSAs are tools you can use to hit two main objectives: saving up for health care costs and sheltering your money from taxes. 

What Is a Health Savings Account (HSA)?

HSAs are savings accounts available to people with a high-deductible health plan. You can use HSAs to pay for qualified medical expenses tax-free.¹

There’s almost nothing we like more than paying fewer taxes! Many employers offer an HSA as part of a benefits package, so be sure to see if one’s available to you. Another option is to open one through a bank or vendor.

What Is a Flexible Savings Account (FSA)?

FSAs are employer-sponsored savings accounts that allow employees to set money aside each year to cover the cost of qualified medical expenses. The funny thing is that despite the name, they’re actually less flexible than HSAs. But that doesn’t mean you can’t use them to flex on some medical costs.

What Are the Differences Between HSAs and FSAs?

The main difference between HSAs and FSAs is that self-employed people can’t get FSAs, but there are a few other things separating the two. We’ll help you understand all the differences between them here.

Taxes

Not only can you contribute to an HSA with pretax money, you can also spend HSA money tax-free! (That’s as long as you’re paying for legit medical expenses—just because you want a brighter smile doesn’t mean you can spend HSA money to have your teeth whitened.)

In case skipping taxes on the front and back end isn’t enough budget boosting for you, HSA money can also be invested for future medical needs—and even for retirement—all while growing tax-free. So, having an HSA allows you to:

• Invest tax-free
• Grow your money tax-free
• Spend your money tax-free

It’s a tax-free triple play! And if your employer happens to offer one as a benefit, be sure to check if they offer an employee match. Once you have your full emergency fund in place, investing in an HSA to get the match is a no-brainer.

As with an HSA, FSAs allow you to dodge the tax man. You don’t have to pay taxes on your contributions or when you withdraw money from your FSA for qualified medical expenses. But remember, both accounts have the same legal limits on what you can spend money on—you can’t just pay for anything tax-free. (So, no, your therapeutic golf club membership still doesn’t qualify.)

Eligibility

As great as it is to have an HSA, it’s important to keep this in mind: You can only open and contribute to one if you have a high-deductible health plan (HDHP).

For 2023, the minimum deductible to qualify for an HSA is $1,500 for an individual and $3,000 for a family.² And even if your plan meets those deductible minimums, not all HDHPs are HSA-qualified. Make sure you ask your health plan administrator or RamseyTrusted health insurance partners at Health Trust Financial for plans that are eligible for an HSA.

Eligibility for FSAs is much simpler. The only way you can get an FSA is as part of an employee benefits package. The self-employed need not apply. And if you do opt for one at work, you’ll also have to decide each year how much gross pay you want deducted from your paycheck. Wherever you land on that, you won’t be able to adjust contributions again until your employer’s next open enrollment.

Contribution Limits

The government sets different annual contribution limits for HSAs and FSAs.

For 2023, individuals will be able to contribute $3,850 while families can contribute up to $7,750 into their HSAs.³

The max contribution for an FSA in 2023 is $3,050.⁴ But be aware that the employer who owns the account can set the limit lower.

Flexibility

One of the great things about your HSA is that it belongs to you and follows you wherever you go, even if it was employer-provided. You can invest your contributions, keep your money in your account for as long as you want, and let it grow for years and years. That’s a pretty sweet perk!

¹Ironically, that’s not the case with an FSA (despite flexible being part of the name). You can’t invest it. And you usually won’t be able to roll the account funds over from year to year. In other words, it’s a “use it or lose it” benefit.

If you’re wondering where the forfeited money goes, the answer is into your employer’s pocket.⁵ They can use it either to cover the cost of administering the FSA program or share the money in other employees’ FSAs. And even if your employer does opt to allow rollovers, you can only roll up to $610 of your 2023 funds for 2024.⁶

Your employer could also offer a grace period of up to 2 1/2 months to use your FSA money in the next plan year.⁷ So, they can offer you a rollover option or a grace period—but not both. And they’re not required to offer either one.

The last thing you want is to have dedicated too much money to an account you no longer need and will simply lose if you don’t spend it. Underfunding your FSA a little bit heads that possibility off (while still getting you some tax savings).

Despite those rules, FSAs could be a good approach for you. The single biggest way the FSA does live up to its flexible namesake is that you can use it to pay for childcare, something an HSA can’t cover. So if you’re a busy working parent and your employer offers an FSA, it might be a great way to pay less taxes and save on that day care bill.

Let’s take a closer look at the differences with a side-by-side comparison:

Can I Contribute to Both an HSA and an FSA?

In most cases, you won’t be able to contribute to both a Health Savings Account and a Flexible Spending Account in the same year.

The only exception is if you have a limited-purpose "HSA-compatible" FSA that specifically covers certain expenses, like dental and vision costs. Only then will you be allowed to contribute to an HSA alongside this specific type of FSA.

How to Choose Between an HSA and an FSA

The truth is that both accounts work really well when paired with an HDHP because they let you save on health insurance premiums. We know having an HDHP and paying more out of pocket before your insurance kicks in might not sound ideal, but it does mean lower premiums. So if you don’t go to the doctor much, you’re probably good with that higher deductible and those sweet premium savings.

Plus, by sending the difference to your HSA tax-free while investing the money for future medical or retirement needs, you can hedge against potentially higher out-of-pocket costs as your investment grows. Smart move!

And while an HSA may seem like a slam-dunk choice—and we admit that the tax-free growth is enticing—an FSA also works well for many people.

Whether you should go with an FSA or an HSA depends on your situation. If your employer offers an FSA as an employee benefit, it might make a lot of sense for you—especially if you’re paying for childcare.

On the other hand (and depending on what Baby Step you're on), the opportunity to grow your investments inside an HSA and roll them over for as long as you want is an incredible way to make progress on both health and retirement goals at the same time.

If you're not sure which one makes sense for you, don't worry. There are experts who can help you figure it out. Our friends at Health Trust Financial can connect you with independent health insurance agents who'll help you sort through your options and pick the one that fits your situation. They're the only company we recommend to help you find the right health insurance, and it's free to connect!