What's the Difference Between an FSA and HSA?

The most significant difference between flexible spending accounts (FSA) and health savings accounts (HSA) is that an individual controls an HSA and allows contributions to roll over, while FSAs are less flexible and are owned by an employer. This means that if you left your job, the funds in your FSA may be forfeited while any funds in your HSA are yours to keep (and rollover into another HSA account). Both FSAs and HSAs allow people to save for their medical expenses on a tax-advantaged basis by using pretax money to pay for qualified medical costs.

Differences Between FSA and HSA

Although FSAs and HSAs both allow people to use pretax income for eligible medical expenses, there are considerable differences between the two account types. These include the qualifications, contributions limits, rules for rollovers and changing contribution amounts, and withdrawal penalties. We have compiled the main differences in the chart below.

Flexible Spending Account
Health Savings Account
  • Must be set up by employer.
  • Requires a high-deductible health plan (HDHP).
  • Cannot be eligible for Medicare.
  • Cannot be claimed as a dependent on another person's tax return.
Annual Contribution Limits
  • Up to $2,650 individual.
  • Up to $5,300 per household.
  • Up to $3,450 individual.*
  • Up to $6,900 per household.
Account Ownership
  • Owned by employer and lost with job change, unless eligible for continuation through COBRA.
  • Owned by individual and carries over with employment changes.
Rollover RulesEmployer chooses whether:
  • Funds expire at the end of the year.
  • Employees get a grace period of 2 1/2 months to use funds.
  • Employees can roll over $500 into next year's FSA.
  • Unused funds roll over every year.
When You Can Change Contributions
  • At open enrollment.
  • If your family situation changes.
  • If you change your plan or employer.
  • Any time, as long as you don't go over the contribution limits.
Penalties for Withdrawing Funds
  • May have to submit expenses to be reimbursed by FSA.
  • Depending on employer, employees may not have access to funds for nonmedical expenses.
  • Savings can be taken out of the account tax-free after age 65.
  • If used before 65, for nonmedical expenses, it is subject to a 20% penalty and must be declared on income tax form.

*If you are 55 or older, you can make "catch-up" contributions, which add $1,000 per year to your HSA contribution limit.

More Qualifications to Set Up an HSA vs FSA

Compared to an FSA, HSAs have more restrictions to qualify. In order to be eligible for an HSA, you will need to have a high-deductible health plan (HDHP) of more than $1,350 as an individual or more than $2,700 as a family. The HDHP must be your only health care plan. In addition, you cannot open an HSA if you're eligible for Medicare or claimed as a dependent on another person's tax return.

In contrast, an FSA must be set up by an employer, meaning that self-employed and unemployed individuals aren't eligible. Business owners are only allowed to contribute to an FSA if they own less than 2% of a company that is an LLC, PC, sole proprietorship, partnership, or S-corporation, or if they own a C-corporation. If an employer does have an FSA set up, there are no eligibility requirements: The FSA is available to any employee, even those without a health plan.

Unlike FSAs, HSAs are available to self-employed individuals as long as they have an HDHP. Not many people prefer to have a high-deductible plan, which requires you to pay more before insurance covers the cost of medical expenses. Additionally, not all plans with deductibles up to the minimum will qualify for an HSA, so you must check with your insurance provider as to whether your health plan is covered and eligible for an HSA.

FSA: Less Flexibility with Lower Contribution Amounts

Flexible spending accounts allow individuals and families to contribute up to $2,650 and $5,300 respectively. Meanwhile, HSAs allow individuals to put in $800 more than an FSA allows and $1,600 more for households. If an employee doesn't have many medical expenses, the FSA will be enough, but the HSA's higher contribution limit may be appropriate for those with more medical costs.

Unlike an FSA, HSAs can follow you to a new employer because the account belongs to you. FSAs belong to the employer, so unless you qualify for a continuation through the Consolidated Omnibus Budget Reconciliation Act (COBRA), you won't have access to your FSA if you leave your place of employment.

Funds Roll Over Using an HSA

One of the biggest benefits of a health savings account is that the contributed funds roll over, meaning that there are no time limits to using the money in the account. The account belongs to the individual rather than an employer, so the individual gets to decide what happens to the unused funds.

In an FSA, unused funds are not automatically carried over to the next year's plan. Moreover, unused FSA funds belong to the employer and not the employee. Employers that subscribe to an FSA can choose one of three options for its employees:

  • FSA Forfeiture: Employees forfeit unused money, which is transferred to the employer.
  • Grace Period: Employees are given 2 1/2 months after the plan year to spend unused money, after which any leftover funds go to the employer.
  • Carryover: Employees can add up to $500 of unused money to the next year's plan in addition to the contribution limit, and any funds over the limit go to the employer.

FSA vs HSA: Which is Better?

Overall, the higher limits and contribution rollover of the health savings account make it a better choice if you can qualify. HSAs are more flexible than FSAs, allowing you to save for potential medical expenses and accumulate money over time. On the other hand, unless your employer allows you to roll over $500 from your FSA each year, your balance won't build up over time. Depending on your employer's preference, any amount you put into an FSA will be lost if not used by the end of the year.

Most of the time, you won't have to choose between an FSA and HSA because the decision will be dependent on your work situation and your insurance deductible. To decide on a plan, check whether your health insurance is eligible for an HSA. If it's not, find out whether your employer offers an FSA plan. If you don't have health insurance and expect to have high medical expenses, check out our health insurance tool to see what you qualify for and whether you will be able to use an HSA.

Can You Use Both an FSA and HSA?

In most cases, you cannot have both an FSA and an HSA because both accounts cover the same health expenses and are dependent on your health insurance or employer. The only way you would be able to have both accounts is if you had an HSA and wanted to enroll in a limited-purpose FSA (LPFSA), which can only be used for vision and dental expenses. You can contribute to both accounts to maximize tax savings, especially if you anticipate having high medical costs during the year. If you qualify, using LPFSA for vision and dental expenses in conjunction with your HSA is a good opportunity, especially if you are maxing out your HSA.

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