FSA vs. HSA: What’s the Difference and How to Pick the Right Account for You (2024)

Paying for healthcare is expensive, even with insurance. In fact, the average family deductible alone is nearly $4,000, according to a recent employer benefits study by non-profit research and polling firm KFF.

Fortunately, the tax code gives you two separate ways to save on everything from copayments to contact lenses: FSAs and HSAs. These tax-advantaged accounts are offered through your employer and can be a lifesaver when it comes to economizing on doctor visits, prescriptions, over-the-counter medications and more. Both FSAs and HSAs are funded with pretax payroll contributions and can help lower your taxable income, but there are important distinctions regarding who is eligible for these accounts and how they’re used.

FSAs, or flexible spending accounts are designed to lower your healthcare spending, as the middle word of the acronym suggests. You get to spend pretax dollars for everyday expenses like sunscreen, period supplies and medication—and a use-it-or-lose-it feature encourages you to make the most of this benefit on an ongoing basis.

HSAs, health savings accounts, conversely, are potentially powerful savings vehicles that give you a tax-preferred incentive to sock away money for big healthcare expenses today. Or, you can grow those funds through investing and then tap a bigger balance for medical needs in retirement.

Read on to discover all you need to know about these two accounts and how to determine which is right for your financial needs.

What is a flexible spending account, or FSA?

A healthcare flexible spending account, or FSA, lets you contribute pretax dollars to an account that you can use throughout the year to pay for a broad range of qualified health expenses. For 2024, the contribution limit is $3,200 (limits are adjusted annually), but you don’t have to contribute the full amount to use the account. You’ll have the opportunity to select your contribution amount once a year, during your plan’s open enrollment period, or if you experience a qualifying life event such as the birth of a child.

Similar to other benefits your employer might offer to help you pay for expenses like commuting or daycare, FSAs let you set up a pool of money each year that you can draw down to pay for a whole slew of health-related costs. FSA contributions can be used to cover the payments for visiting the doctor, including copayments and deductibles. Your FSA money can also go toward both prescription and over-the-counter medications as well as medical supplies and equipment including diabetic test strips, pregnancy tests, period supplies, blood-pressure monitors and eyeglasses.

FSAs are offered by employers, and you have to be eligible to enroll in your employer’s health insurance to open an FSA — although you don’t have to actually get your insurance through their plan. In other words, if you could enroll for health insurance through your employer but you choose to be on a spouse’s plan instead, you could still open an FSA at work.

“The FSA basically works with any kind of health insurance plan so from that perspective, the ‘flexible’ in the name is pretty good,” says Roy Ramthun, founder and president of consulting firm HSA Consulting Services.

The IRS sets inflation-adjusted annual maximum contributions, although unlike some other tax-preferred accounts such as 401(k)s and HSAs, workers age 55 and up don’t get the opportunity to make extra catch-up payments.

One key FSA downside: With a couple of exceptions, if you don’t use your contributed funds by the end of the year, you’ll lose them. You also lose any unspent contributions if you part ways with your employer — say, if you quit or are laid off in the middle of the year.

What is a Health Savings Account, or HSA?

A health savings account, or HSA, also is an account where you can contribute in pretax dollars in order to pay for qualified health expenses. The annual contribution maximum, which also changes annually, is considerably higher—as much as $4,150 for eligible workers ($8,300 for a family)—which reflects the greater flexibility you have in how you use these dollars. Along with FSA-eligible medical and prescription expenses, you can also use HSA contributions to contribute to a few, specific types of health insurance premiums (more on that below).

An HSA functions somewhat like a 401(k) for healthcare expenses, because the funds in HSAs don’t expire and you can build up a balance over the years through contributions and by investing the money so it compounds.

There are some other significant differences between HSAs and FSAs. HSAs are only available to people enrolled in high-deductible health plans, often referred to as HDHPs, that meet minimum deductible and out-of-pocket cost thresholds.

For 2024, HSA-eligible HDHPs have a minimum deductible of $1,600, or $3,200 for a family plan, with annual in-network out-of-pocket maximum expenses capped at $8,050 and $16,100.

In addition, the maximum amount you can contribute, which the IRS adjusts annually for inflation, is based on what type of health plan you have and your age.

One primary difference between HSA and FSA account types is because you can open an HSA through your employer or independently, the account belongs to you, not your employer. This means the funds you contribute to an HSA are portable. If you leave your job, you take that account with you, and the money in it rolls over from year to year. To maximize the accrued value of this cash cache, some HSA plans give you the option of investing your balance in instruments such as index funds.

HSA vs FSA comparison chart

Despite the similar-sounding names, FSAs and HSAs are structured differently and are intended for different purposes, although both help workers save on health expenses for themselves and their families. Here are the key differences between the two account types.

If my employer offers both, how do I choose?

If your employer’s healthcare offerings give you the option of opening an FSA or an HSA, consider what type of health plan you have and where the bulk of your health spending goes to figure out if a flexible spending account vs. health savings account is best for you.

Here are a few key factors that can help guide you toward one or the other.

Consider an HSA if you have a high-deductible health plan

To be eligible for an HSA, you need to have a high-deductible health plan, or HDHP, that meets certain criteria. For 2024, an HSA-eligible HDHP has a minimum deductible of $1,600, or $3,200 for a family plan. Eligible plans also cap annual in-network out-of-pocket maximums at $8,050 and $16,100, respectively. If you have health insurance that doesn’t fall within those parameters, you can’t open an HSA. (If you already have an HSA and then switch health plans, you can keep your HSA but can’t contribute to it until if or when you revert to an eligible HDHP in the future.)

You can open and fund an HSA whether you get your healthcare through your job or via the Affordable Care Act marketplace, but keep in mind that the ACA’s definition of a high-deductible health plan might not necessarily conform to the criteria for HSA eligibility.

Consider an FSA if you get your health insurance at work.

If you want to open an FSA, you need to work for an employer that offers the benefit, says Steve Jackson, senior vice president of sales for Health-E Commerce, the parent company of FSA Store and HSA Store. This means patients who get their health insurance through the Affordable Care Act marketplace aren’t eligible for healthcare FSAs.

“The only way you can participate in a health FSA account is if you’re employed by an employer that offers a group health plan,” he says. You can still open an FSA even if you get your health insurance from another place — say, from a spouse’s employer-sponsored plan — but you have to be eligible for FSA enrollment through your job.

Consider an HSA if you think you may leave your job

Because you need to get an FSA via an employer, this means that if you leave your job — whether you leave voluntarily or are laid off or terminated — you’ll also lose access to any unspent money in that account, a factor to take into account if you’re actively job-hunting or work in a field with low job security.

Other criteria to consider when weighing the question of an HSA vs FSA account are your anticipated medical expenses and your job security. If you have a large, anticipated medical expense such as a planned surgery or the birth of a child, take into account the extent to which either account type could help defray your out-of-pocket costs.

What about HRAs?

You might also see the opportunity to participate in an HRA, or health reimbursem*nt arrangement. An HRA is similar to an FSA in that it is a tax-preferred vehicle companies can use to help employees defray their medical expenses.

The big difference between an FSA and an HRA is the source of the contributions, says Kevin Robertson, executive managing director and chief revenue officer of HSA Bank, a division of Webster Bank that manages tax-preferred health accounts for employers and consumers.

Employee payroll contributions fund FSAs, while employers fund HRAs, Robertson says. As a result, having an HRA doesn’t lower your taxable income.

And HSAs are one step further removed, Robertson adds. “An HSA is a savings account, and HRAs and FSAs are spending accounts.” Although people sometimes refer to HSAs as health spending accounts, the reality is that the savings component, along with the ability to invest those savings in vehicles such as mutual funds to maximize the value of your contributions, is what sets HSAs apart.

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