What's the Difference Between an FSA and an HSA?
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Last Updated: 05/13/2024
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*Please note: the discussion of FSAs in this article refers specifically to a health or medical FSA, not a dependent care FSA.
Employees' healthcare insurance needs generally vary, which is why businesses may also want to offer additional health and wellness programs as part of their employee benefits package. For example, employers can choose to provide the option of a health flexible spending account (health FSA), a health savings account (HSA) or perhaps both choices. Among their numerous benefits, health FSAs and HSAs both allow employees to contribute pre-tax dollars to an account earmarked for qualifying medical expenses. When evaluating the alternative features of health FSAs vs. HSAs, employers should estimate employee usage and the relative costs and benefits of each.
Health FSA vs. HSA — Key Differences
Both health FSAs and HSAs offer tax advantages, but they each have unique characteristics to consider. Here are some of the differences between FSAs and HSAs:
- HSA account holders must participate in a qualified high-deductible health plan (HDHP) while FSA account holders are not restricted to a certain type of health plan.
- The individual employee owns the HSA and can carry it to different employers, while a health FSA is associated with the employer and is not portable.
- HSAs are available to self-employed individuals, but FSAs are not.
- Unused HSA contributions may be rolled over to the next fiscal year, while an health FSA's unspent dollars may be subject to rollover limitations or may be forfeited at the end of the year.
- The annual total of an employee's health FSA contributions becomes immediately available, while HSA contributions are only available for spending after they are deposited to the employee's account.
- HSA account holders may withdraw funds for non-qualifying medical expenditures, subject to taxes and penalties. FSAs do not permit withdrawals for non-qualifying expenditures.
- HSAs pay interest but FSA balances do not earn interest.
What Is an HSA?
An HSA is an employee-owned health savings account where pre-tax dollars may be deposited and used to pay for qualifying medical expenses. Employees may set aside a specified amount from their paycheck and divert the funds into an HSA if they participate in a qualified HDHP. Employers may also contribute funds to an HSA. One important feature of an HSA is transferability. Because an HSA belongs to the employee, any remaining balance goes with them when they leave the company. Also, unused funds in an HSA can be rolled over from one year to the next.
What Is a Health FSA?
A Health FSA is a flexible spending account that gives employees the opportunity to contribute pre-tax dollars throughout the year and use them to pay for qualifying medical expenses. FSAs are owned by employers, who may also contribute to the account on the employee's behalf. Employees do not need to participate in a qualified HDHP to contribute to an FSA. However, the funds are not transferable if the employee leaves the company. FSAs also have limitations on the amount and timing of reimbursement. If all funds are not used at the end of the year, employers may choose to provide a grace period or allow for a specific amount of unspent funds to be carried over to the following year.
Read more about the features of FSAs and HSAs.
FSA vs. HSA Comparison Chart: How Do These Accounts Differ?
The relative benefits of health FSAs vs. HSAs may make one a better choice for an employee based on their individual situation. In the midst of benefit negotiations, employees may request one type of account over the other. Businesses will want to weigh factors such as administrative costs and expected usage before choosing to implement one or both plans.
Note: The IRS announced the 2025 HSA limits in May and these are reflected in the chart below. The 2025 FSA limits will not be released until the fall (generally, in October).
| Item | FSA | HSA |
|---|---|---|
| Contribution Limits |
$3,200 in 2024 |
$4,300 per individual and $8,550 per family in 2025 |
| Account Ownership |
Employer owns the account and unused funds revert to them |
Employee owns the account and may carry the funds to a new job |
| Eligibility | Benefits-eligible employees Employers must comply with IRS requirements that may restrict the participation of highly compensated or key employees Self-employed individuals, partners of a partnership, LLC members, and more-than 2% shareholders of an S-Corporation may not participate in an FSA, however, they may provide an FSA for their employees | Employees participating in a qualifying HDHP
Self-employed individuals, partners of a partnership, LLC members and more-than 2% shareholders of an S-Corporation may open an HSA, but contributions are made on an after-tax basis |
| Eligible Expenses | Qualifying medical expenses as defined by IRS | Qualifying medical expenses associated with an HDHP as defined by the IRS |
| Rollover Rules | Participants are subject to the “use it or lose it” rules, which means that their FSA balance needs to be used prior to the end of the plan year. The exception to this is if an employer elects a grace period, which allows for an extension of time to incur expenses, or a carryover, which allows a specific amount to carry forward to the following plan year | No “use it or lose it” rules, contributions may accrue from year to year
Since the account belongs to the employee, it remains with them in the event of a job change |
| Withdrawal Rules | Withdrawal permitted only for qualifying medical expenses | Tax-free withdrawals for qualifying medical expenses
Additional withdrawals are taxed along with a 20% penalty for those under 65 Withdrawals for nonmedical purpose after age 65 are taxed at individual's current tax rate, but no penalty is assessed |
| Access to Funds | Full amount of annual contribution is available on the first day of the year, regardless of how much the employee has contributed | Funds available are limited to the amount the employee has contributed at the time of withdrawal |
| Reimbursement | Employee must provide a written statement from a third party validating the expense along with a statement claiming that the expense is not covered by any other healthcare plan Reimbursement permitted using debit cards, credit cards, stored value cards, checks, and direct deposit if amounts paid can be substantiated under IRS-approved methods | Account holders pay for expenses using a debit card or check linked to the HSA
Account holders may also pay out of pocket and request reimbursement from the account |
| Option To Change Contribution Amount | Contribution amount is set at the beginning of the year and may not change unless a qualifying event occurs, such as a change in family status due to the birth of a child | Contribution amounts may be changed during the year as long as they do not exceed the maximum set by the IRS (Excess contributions are taxable, and subject to a 6% excise tax) |
Which Is Better: Health FSA or HSA?
Although both plans offer tax savings for employees and employers, health FSAs and HSAs each offer unique features and relative benefits. Depending on your employee demographics and healthcare usage, one type of reimbursement account may work better for your business. Your choice of healthcare plan will also affect your decision to offer a health FSA vs. HSA. If your company does not offer a qualified high-deductible health plan, a health or limited-purpose health FSA is the only option among the two accounts.
Benefits of Health FSAs and HSAs
FSA Benefits
FSAs do not restrict the type of healthcare plan a company must offer. Also, unused funds are reverted to employers at the end of the year, or after a grace period or a specified amount of unspent funds to be carried over to the following year. Employers gain tax savings related to employees' pre-tax contributions as they are not required to pay their share of Social Security tax on these amounts. In terms of employee satisfaction and retention, the small cost of administering an FSA often yields a valuable benefit for employees who choose to participate.
HSA Benefits
Offering an HSA in conjunction with a qualified HDHP will generally yield cost savings for businesses compared to traditional health care plans, because a qualified HDHP is a less expensive option. Like FSAs, HSAs also result in tax savings for employers. Additionally, HSAs offer potential retirement benefits to employees when unused funds are carried over and may be withdrawn on a taxable basis for nonmedical expenses when participants reach age 65.
Challenges of Health FSAs and HSAs
Health FSA Challenges
FSAs have a lower contribution limit compared to HSAs, which reduces employees' comparative tax savings. Unused funds generally may not be carried forward. FSAs are also managed by the employer and are subject to some of the limitations of fringe benefits programs.
HSA Challenges
HSAs are offered only to employees participating in a qualified HDHP. This limits the type of healthcare plans you may choose to offer if your company wishes to provide access to an HSA.
Health FSA and HSA Tax Impact and Savings Potential
Note: The IRS announced the 2025 HSA limits in May and these are reflected in the copy below. The 2025 FSA limits will not be released until the fall (generally, in October).
Both health FSAs and HSAs are popular due to their tax savings potential. Current IRS limits for 2024 allow individuals to contribute up to $3,200 to a health FSA on a pre-tax basis. HSA pre-tax contribution limits for 2025 are $4,300 for individual coverage and $8,550 for family coverage. This translates into lower taxable income. For example, if you make $100,000 in a year, but contribute $5,000 to an HSA for yourself and your family, you would only pay federal taxes on $95,000 in income. Withdrawals from these accounts are also tax-free if the funds in the health FSA or HSA are used to pay for qualifying medical expenses. For HSAs, interest earned is also considered tax-free.
Can You Offer Both a Health FSA and an HSA?
Companies can offer both types of plans, but participants will need to choose one over the other for qualifying medical expense reimbursements. A limited-purpose health FSA plan may be offered for HSA participants wishing to set aside extra funds for dental and vision expenses not covered by a qualified HDHP.
Choosing the Benefits and Healthcare Plan That's Right for Your Business
Your choice between a health FSA or HSA often comes down to the type of benefits and healthcare plans you want to provide. If you offer a qualified HDHP, an HSA allows for larger contributions and additional flexibility to carry over funds from year to year. If you find that a qualified HDHP does not make sense for your employee base, sticking with a traditional healthcare plan and offering a health FSA may yield better utilization and employee satisfaction. Whether you choose one type of plan or both, health FSAs and HSAs offer important benefits that can help employers and employees manage rising healthcare costs.
If you need further assistance, Paychex employee benefits services is ready to help you navigate the complexity of healthcare plan administration. We can work with you to weigh the relative costs and benefits of the many options available.
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