FSA vs. HSA: What’s The Difference?

Health savings accounts and flexible spending accounts offer two of the best ways to put aside money tax-free for health care expenses.

A health savings account (HSA) offers the opportunity to build a stash of cash that can help you pay medical expenses for years or even decades. But not everybody is eligible for an HSA.

On the other hand, just about everyone is eligible for a flexible spending account (FSA). However, you generally can’t carry over money in this savings account into the following year. Either you use it or you lose it.

Here’s more about these medical savings accounts and which one is best for you.

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What’s an HSA?

A health savings account allows you to save money on a pre-tax basis that later can be used to pay for qualified medical expenses. More commonly known as an HSA, this account has triple tax advantages:

• You can deduct the money that goes into the account during the year you make the contribution.
• The money grows tax-free.
• You can withdraw the money tax-free when you use it for qualified medical expenses.

In essence, you will never owe income taxes on the money you put into an HSA as long as you use it to pay for qualified medical expenses.

Keep in mind that if you’re 65 or older you will be taxed at standard income rates for withdrawals for expenses that don’t qualify as medical costs. If you’re under age 65, you pay a 20% penalty for non-medical withdrawals, in addition to the tax penalty.

In 2022, you can contribute:

• Up to $3,650 to an HSA for self-only coverage
• Up to $7,300 for family coverage

To qualify for a health savings account, you must:

• Have a high-deductible health insurance plan
• Not be enrolled in Medicare
• Not be claimed as a dependent on anyone else’s taxes

In 2022, a high deductible health plan is defined as one with:

• A deductible of $1,400 or more for an individual and $2,800 for a family.
• Annual out-of-pocket expenses can’t exceed $7,050 for an individual or $14,100 for a family.

What’s an FSA?

A flexible spending account is a benefit program you get through work that lets you set aside money on a pre-tax basis to pay for health care expenses throughout the year.

More commonly known as an FSA, you generally must use the money in the account within the year that you contribute it. If you don’t, you forfeit the cash.

However, companies have the option to offer one but not both of the following exceptions to this rule:

• A “grace period” of up to 2.5 extra months after the end of the year to use your FSA funds
• The ability to carry over up to $570 per year to use on medical expenses in the following year

In 2022, you can contribute whatever your employer allows to an FSA account, with a cap of $2,850.

What Can You Pay for With an HSA?

You can use an HSA to pay for many different types of medical expenses. The IRS says that an expense that qualifies for the medical and dental expenses tax deduction generally also serves as a qualified medical expense for an HSA.

You can find a list of such expenses in Publication 502, Medical and Dental Expenses. The list is long, but some examples of common services and expenses on it include:

• Acupuncture
• Birth control treatment
• Blood sugar test kits for diabetics
• Breast pumps and lactation supplies
• Chiropractor services
• Contact lenses and solutions
• Dental car
• Doctor’s office co-pays
• Drug prescriptions
• Eyeglasses
• Feminine hygiene products
• Hearing aids and batteries
• Infertility treatments
• Insulin
• Laser eye surgery
• Over-the-counter medicines (purchased after 2019)
• Physical therapy
• Speech therapy
• Stop-smoking programs
• Vision exams

What Can You Pay for With an FSA?

As with an HSA, the IRS says that an expense that qualifies for the medical and dental expenses tax deduction generally also serves as a qualified medical expense for an FSA.

As with an HSA, you also can use an FSA to pay for over-the-counter medicines. This is a change to the law that was implemented beginning in 2020.

As part of this change, you also now can use an FSA to pay for menstrual care products.

HSA vs. FSA: What’s the Difference?

“HSA” and “FSA” are separated by just one letter, but there are major differences in terms of what these two types of health savings plans offer.

Below are some of the key similarities and differences.

HSA vs. FSA

	HSA	FSA
Annual amount you can contribute	$3,650 for self-only coverage $7,300 for family coverage	Determined by employer, but limited to $2,850
Employer can contribute to account	Yes	Yes
Employee can take account with them when they change jobs	Yes	No
Pre-tax contributions allowed	Yes	Yes
Can carry over year to year	Yes	No, with some exceptions
Can invest in stocks for growth	Yes	No
Need high-deductible health plan to qualify	Yes	No
Required to report on tax return	Yes	No
Can be used to pay for most over-the-counter medications	Yes	Yes

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Pros of HSAs

Health savings accounts offer many positives:

• If you use HSA funds to pay for qualified health expenses, the money will never be subject to income taxes.
• The amount you can save is much more generous than what you get with an FSA.
• You can carry the money over year to year and can bring your HSA funds with you after you leave your employer.
• You can invest the money in stocks and other instruments, potentially dramatically growing the amount of money in the account.
• Your employer may contribute to your HSA.

Cons of HSAs

Health savings accounts also come with some negatives:

• You must have a high-deductible health plan to qualify for an HSA.
• If you withdraw the funds to pay for things other than qualified medical expenses, you typically owe a 20% penalty plus income taxes.
• Some HSA plans might not offer the option to invest in stocks.

Pros of FSAs

Flexible spending accounts offer many positives:

• FSAs provide an easy way to save in a tax-advantaged way for medical expenses.
• Your employer may contribute to your FSA.
• You don’t need to report your FSA contributions on your tax return.

Cons of FSAs

Flexible spending accounts also come with some negatives:

• The amount you can save is far less than in an HSA.
• You typically must use the money in the year in which you make the contribution, or you will lose it.
• Unlike an HSA, an FSA is not portable so you can’t take it with you if you change jobs.

How Do You Use an HSA or FSA?

With an HSA and FSA, you typically either pay for your expenses with a debit card and the funds are directly debited from your account or you pay with your own funds and submit a receipt for reimbursement.

Keep your receipts in case you must provide documentation of the medical expense you incurred. Rules may differ from employer, however, so make sure you ask your company how the process works.

FSA vs. HSA Frequently Asked Questions