FSA vs. HSA: What’s the Difference?
Key Highlights:
- FSAs and HSAs both let participants lower taxable income by setting aside pre-tax dollars for qualified medical expenses, but there are differences. FSAs can be “use it or lose it,” for example, while HSAs roll over their balance year to year.
- FSAs work well for shorter-term, predictable healthcare costs while HSAs function more like personal savings accounts available for long-term use.
- HSAs require enrollment in an eligible health plan and offer higher contribution limits, including catch-up contributions for those 55 and older. Both accounts provide tax advantages for employers.
What Is an FSA?
Flexible spending accounts, established in 1978, allow participants to set aside a portion of their salaries to pay for health expenses before employment taxes are calculated. Participants spend the money on qualified expenses that go beyond copayments and coinsurance to include a wide range of items and services, from adhesive bandages to sunscreen to mobility aids.
Yearly Contributions
Each year, participants select how much they want to contribute to an FSA, up to a yearly maximum set by the IRS ($3,300 for 2025 and $3,400 for 2026). The amount a person designates will be deducted from their paychecks, lowering their taxable income each pay period throughout the year. Employers also are allowed to contribute to participants’ FSAs according to IRS guidelines. If they do, the total of employer and employee contributions cannot exceed the yearly contribution maximum.
Yearly Benefit Period
FSA deductions align with a designated benefit year: If the employer’s health or dental plan runs from January to December, the FSA funds will be deducted during that time frame. Participants may need to provide the FSA administrator (the employer or a third party hired by the employer) with copies of receipts showing the cost and date of the qualified expense to be reimbursed. The money used for reimbursement is not subject to taxes.
FSA funds traditionally were used for only one benefit period and would not cover costs incurred in the next benefit period, though plans now can include a maximum rollover option. Participants enroll in an FSA each year and establish the contribution amount for that year.
“FSAs work best for people who know they will have medical expenses but feel they don’t have a lot of disposable income,” Kendrick said. “They reduce the fear of having to come up with additional money for a qualified medical expense. Since the money is deducted from their paychecks, participants can budget for medical, dental, and vision expenses knowing they’ll have money to pay expenses over the course of the year.”
What Is an HSA?
Health savings accounts, which were created in 2003, also allow participants to set aside money to cover qualified expenses, but there are some differences. Participants can make deposits through payroll deductions, and they can deposit money in the HSA at any time over the year.
Payroll deductions are pulled from an individual’s pay before their employer removes taxes. Self-employed individuals make their own deposits into an HSA account, which are also deducted from the amount of tax they owe. In both cases, the total for the year must not exceed the yearly maximum. HSAs work like a typical checking account.
Funds deposited in HSAs can carry over from year to year, providing an opportunity for long-term savings. Many HSAs give participants the opportunity to grow their funds by investing in stocks and bonds. The money put into HSAs and the interest it earns is not taxed. HSA funds also are not taxed when they are distributed to pay for qualified medical expenses.
“Because funds roll over from year to year and can be invested for even more growth, HSAs can help build long-term savings. Individuals own the account, so they keep it if they change employers or retire,” Kendrick said.
Specific Health Plan Requirement
To establish an HSA, the participant must enroll in an HSA-eligible health plan — typically a high-deductible health plan (HDHP). High-deductible health plans often have lower monthly premium rates and higher deductibles for individual and family coverage. Contributions to the HSA can be made only while the participant is enrolled in an HSA-eligible health plan. However, the funds accumulated can be accessed and used after the participant is no longer enrolled in such a plan.
Yearly Contributions
In addition to participant contributions, HSAs allow anyone else — such as a spouse, dependent, or family friend — to contribute to a participant’s HSA account. The total amount that can be contributed will have an annual maximum established by the IRS and will vary for account holders who have individual health plan coverage versus account holders who have family coverage ($4,300 for individuals and $8,550 for a family in 2025, and $4,400 for individuals and $8,750 for families in 2026).
People 55 or older can contribute an extra $1,000 per year. Contributions to HSAs must stop six months before a participant retires or begins receiving Medicare benefits.
Withdrawing HSA Funds
Participants can withdraw HSA funds tax-free to pay for qualified medical expenses whenever they choose. Unlike FSAs that can require submission in the same benefit period, participants in HSAs typically have more flexibility with their money.
HSAs may also be used to pay for nonqualified medical expenses or other nonmedical related expenses, but those reimbursement funds are subject to income tax and may incur other penalties.
Are There Advantages to Employers to Offer FSAs or HSAs?
FSAs and HSAs provide tax advantages to participants. They provide similar tax advantages* to the employers that offer them. When employees contribute to their FSA or HSA account, they lower their taxable income. This in turn lowers the amount of FICA taxes both the participant and employer pay. FSAs may also lower the amount of state taxes employers are required to pay.
HSA vs. FSA: A Side-by-Side Look
FSAs and HSAs both provide consumers with a way to set aside money to pay for covered medical expenses. While similar in many ways, there are important differences between the two:
FSAs are short-term accounts that often pay for qualified expenses in the same benefit year incurred. HSAs commonly are viewed as an additional tool to save for retirement by allowing money to be invested and rolled over year after year if not immediately needed for health expenses. Both FSAs and HSAs provide opportunities for participants to save pre-tax dollars to pay for qualified medical expenses.