HSA vs. FSA: What's the Difference?

Both health savings accounts (HSA) and flexible spending accounts (FSA) allow people to use pretax money to pay for qualified medical costs. HSA vs. FSA: what’s the difference?

PolicyPals team

Published January 18, 2021.

Healthcare coverage can often be expensive even on the best plans or insurance through your employer, but the federal government provides various programs to help alleviate some of that financial burden and encourage consumers to save for medical expenses not covered by insurance.

Key Takeaways

The most typical types of accounts are flexible spending accounts (FSA) and health savings accounts (HSA). In order to be eligible for either of these types of accounts, you must meet certain guidelines. For example, self-employed people are eligible to open an HSA, but not an FSA.

Health Saving Account (HSA)

An HSA is a plan for those who either do not have insurance or have a high deductible health insurance plan. It is meant to help pay for some of the costs of the high deductible.

Individuals deposit all or a portion of the deductible into their HSA account until the allowed maximum amount is met. The government determines every year what is the maximum amount an individual can contribute to an HSA, as  well as the minimum deductible amount a plan can have to qualify as an HDHP

The deposited funds can then be used to pay for medical expenses, not only for health insurance deductibles. You can use the money for all types of health-related expenses, like eyeglasses, chiropractic care, prescriptions, talk therapy, among other things.

Oftentimes, HSA contributions are made through a payroll deduction from an employee’s gross income with the employee’s permission, but you do not have to be employed to have an HSA. The money is pre-tax, as well as interest and earnings on the account. This is a tax benefit that allows you to reduce your taxable income. 

An important note is that HSAs are portable, meaning if you leave your job, you can take it with you. Also, unused contribution can be rolled over to the next year.


Flexible Spending Account (FSA)

A FSA is similar to an HSA in a lot of ways, but there are some subtle yet important distinctions.

Most importantly, an FSA is offered exclusively by an employer and come as part of the benefits an employee can receive, but FSAs do not always require the money to be spent on healthcare expenses. 

Some people have Dependent Care FSA (DCFSA) to cover childcare or dependent costs. Since it is considered a flexible account, there are lots of different expenses the funds may be used for, such as health products like vitamins and massage therapy, and childcare or dependent expenses.

All this money is pre-tax, like an HSA. An important note on the FSA is that you must declare to your employer how much you want it to be funded and by a certain enrollment period. If you do not, you will not be eligible for the account or change it until the following year.

Finally, note that you will lose any amount you haven’t spent at the end of the year. Even if your employer has chosen the rollover option, the amount you could roll into the next year is limited to $500.

Both HSAs and FSAs are great tax-saving options for medical and other expenses. If you believe you are eligible for one of these accounts and would like to open one, contact your employer with questions or a health insurance agent you trust.