HSA or FSA? What’s the difference?

HSA vs. FSA; woman's hand taking notes in a notebook

Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) have similar acronyms, and they can be confusing. An example of confusion is that while both offer valuable benefits, some of those benefits overlap. If both are available to you, be aware of their differences and similarities to determine which is best for your needs.

What are HSAs and FSAs?

Health Savings Accounts (HSAs) are tax-advantaged accounts that let you pay for qualified healthcare expenses with funds contributed by you, your employers, or others such as family members. They have the “savings” moniker because they can grow over time through balance rollover from year to year, interest earned on unspent balances, and gains on invested balances.

Flexible Spending Accounts (FSAs) contain funds from an employee’s payroll. No one else is permitted to contribute. Further, those deductions come out of the payroll, and then the payroll taxes are calculated. FSA funds can pay for healthcare and some wellness expenses. The FSA owner must spend the entire balance during a single plan year, hence the “spending” moniker. Further, the account balance does not earn interest, nor can it be invested. However, you may be able to carry over some unspent balance to the following year, depending on your plan.

How are they similar?

HSAs and FSAs help consumers manage their healthcare costs better. Employee participants can spend their tax-free funds on a wide variety of healthcare expenses for themselves and their tax dependents. Most of the eligible products and services are the same for both programs.

Employers can sponsor both HSAs and FSAs, although employees cannot have both simultaneously. (There is an alternative FSA, called a Limited Purpose FSA, that pays only for dental and vision expenses. The LPFSA is the only type of FSA account that owners of active HSA accounts can have at the same time.)

How are they different?

Two of the most notable differences between HSAs and FSAs involve ownership and portability. An HSA account is owned by the account holder, whether the employer contributes funds or not. If the employee leaves the company, the account goes with them. Conversely, FSAs belong to the employer, even though the employee makes all the contributions. If the employee leaves the company, unspent funds revert to the employer.

An HSA has two additional advantages over FSAs. First, at the end of the plan year, any remaining money in the HSA account automatically rolls over to the following year. Second, account owners can invest their HSA balance without paying taxes on the earnings. The ability to invest tax-free contributions in any way you want, for as long as you want, offers a significant long-term financial advantage.

Here’s a quick overview of the similarities and differences between HSAs and FSAs.

HSA vs. FSA – Breaking Down the Differences

Health Savings AccountFlexible Spending Account
Eligibility requirementEnrolled in High Deductible Health Plan (HDHP)None
FundingAccount holderAccount holder
2022 Contribution limitsIndividual: $3,650; Family: $7,300$2,850
Changing contributionsAny time during the yearDuring open enrollment or with a change in employment or family status
Interest earnedYesNo
Tax advantages1. Tax-free contributions
2. Tax-free withdrawals when used for qualified medical expenses
3. Earn tax-free interest
4. Employee-made contributions may be excluded from gross income
1. Tax-free contributions
2. Tax-free withdrawals when used for qualified medical expenses
3. Employee-made contributions may be excluded from gross income
PortabilityStays with account holderNone, except if eligible for FSA continuation through COBRA
Integration with other tax-advantaged accountsNoneYes
Ability to investYesNo
Rollover/Account AccumulationYesPartial. Some employers offer up to $570 rollover or a grace period of 2.5 months to spend unused funds
Funds available for use in retirementYesNo

Each account has its advantages. FSAs have fewer enrollment requirements, while HSAs offer additional tax savings on interest earnings and investment gains. The entire FSA balance is available on the first day of the plan year, while HSAs are always owned by the account holder. Both types of accounts offer significant tax savings on contributions. Consider the benefits of each and determine which is best suited for your situation.

DataPath, Inc. creates innovative solutions for tax-advantaged benefits administration, including FSAs and HSAs.

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