FSA vs. HSA — What's the Difference and Which Is Right for You?

If you’ve ever signed up for health insurance, it’s very likely you were offered a plan that might have included a Flexible Spending Account (FSA) or a Health Savings Account (HSA).

And while both plans can help cut down on taxes and save on dental, medical, vision and other expenses, they’re also quite different when it comes to benefits, contributions, and features.

Let’s explore the differences between an FSA vs. HSA and find out which is right for you.

A Flexible Spending Account (FSA), typically offered by employers, is a tax-exempt account that lets you set aside pre-tax dollars to pay for eligible healthcare expenses. You have to use the funds before they expire at the end of the plan year or you’ll lose them.

Recently, the IRS announced cost-of-living adjustments for FSA and HSA accounts. The maximum salary reduction limit for a Health FSA has increased from $2,850 in 2022 to $3,050 in 2023 and the carryover limits have increased to $610.

Meanwhile, a Health Savings Account (HSA) is also a tax-exempt account that's used to pay for eligible healthcare expenses. You can contribute to an HSA if you have a high-deductible health plan. The funds in an HSA can roll over from year to year, as the account is owned by the individual.

For those with an HSA, the annual contribution limits have increased from $3,650 to $3,850 for individuals and $7,300 to $7,750 for couples in 2023. There is no change to the catch-up contribution limits for those 55 and older.

While HSAs and FSAs are both tax-exempt savings accounts designed to help you pay for medical expenses, there are advantages and disadvantages to each plan.

Some of the advantages of an HSA include the ability to invest your funds — they’ll carry over year to year — and you can withdraw funds after age 65 for non-medical reasons without a penalty. But the biggest disadvantage to an HSA is that you must have a high-deductible health insurance plan to get one.

FSAs are typically offered by employers, and even though funds don't carry over in full year to year, one great advantage to an FSA is that your funds are available the day you enroll. FSAs can be used for more healthcare expenses, such as over-the-counter medications, while HSAs are limited to eligible medical expenses.

One of the biggest disadvantages to an FSA is that you must use it or lose it — at the end of the year you’ll have to forfeit your unused funds.

You may be wondering if an HSA or FSA is right for you. Knowing which is better for you depends on your healthcare needs and current financial situation.

Overall, HSA plans are more flexible, your pre-tax contributions lower your tax bill, and you can save money over time, but the high deductible cost isn't ideal for everyone. And while you must use the money you contribute to an FSA, it offers cost savings and budgeting for medical expenses.

Long story short, if you don't qualify for an HSA, an FSA is a great alternative and is probably your best bet.