When choosing health benefits, many people wonder what the best way to save for health care costs may be for them. What tax-advantaged opportunities are they eligible for, and what options does their employer offer? Should they opt for an HSA—or would an FSA be better? Or maybe even some combination of both?
Here's what you need to know about HSAs and FSAs, to help you decide which is right for you and your family.
What are HSAs and FSAs?
Health savings accounts (HSAs) and flexible spending accounts (FSAs) can both let you set aside money before it's been taxed to pay for health care costs. Any withdrawals are also tax-free, provided you use them to cover qualified medical expenses.1 This can help increase the money you have available to pay for medical bills.
For instance, someone in the 22% federal income tax bracket could potentially save nearly 30% in taxes (federal income + FICA + potentially state income) on every dollar contributed to an HSA or FSA.
HSAs and FSAs are generally offered by employers as part of benefits packages, though you may be able to open an HSA on your own if you have an HSA-eligible health plan through work, your spouse's employer, private insurance, or the insurance marketplace. In that case, you'd be able to deduct any HSA contributions you make from your annual tax return, though these contributions may not avoid Medicare and Social Security taxes.
HSA vs FSA: Key differences
Outside of the similarities, HSAs and FSAs differ in a few important ways:
You can carry over unused HSA funds
HSAs allow you to carry money forward indefinitely, so your funds are there for you year after year. This can make things easier if you happen to contribute more than you spend on qualified medical expenses in a year—you won't have to rush to buy Band-Aids, or glasses before your money expires. But it's especially helpful in building savings to pay for large, future medical expenses, like those you anticipate having in retirement.
FSAs, meanwhile, are generally "use it or lose it." This means that when the new benefit year begins, you may forfeit whatever funds remain in the account from the prior year. Some employers may allow you to carry forward a small amount of your unused balance up to a maximum of $640 in 2024 and $660 in 2025, although employers may choose to have a lower carryover limit. Alternatively, employers can offer a grace period (normally up to 2.5 months), but they cannot offer both. Check with yours to see if either of these options is available to you.
You can invest the money in your HSA
Unlike with an FSA, you can invest the money in your HSA, which may potentially grow your savings over time. This lets you position your funds to benefit from compound returns. Combined with the ability to carry over funds from year to year, you may be able to build up a nest egg to pay for qualified medical expenses in future working years or retirement. On average, according to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old retired individual may need $165,000 in after-tax savings to cover health care expenses.2
You can decide how much or little you want to invest in your HSA. Some people invest all of the funds they hold; others prefer to save some—or all of their balance—in cash for current expenses. It's your account, so it's your decision.
Whether you can open an FSA depends on your employer; HSAs are determined by your health insurance
To be eligible for an HSA, you must be enrolled in an HSA-eligible health plan and not have other disqualifying health coverage. Ask your benefits provider if you aren't sure which kind you have. FSAs, on the other hand, are employee benefits that anyone can contribute to as long as they are eligible and their employer offers them.
Can you have an HSA and FSA?
If you're contributing to an HSA, you can't fund a health care FSA in the same year. But you can have an HSA along with a limited purpose FSA if your employer offers it. This type of FSA covers only those expenses not covered by your health plan, namely dental and vision expenses.
Note: This does not impact the ability to have a dependent care FSA, also known as a dependent care assistance program.
You may be able to contribute more to an HSA than an FSA
Both HSAs and FSAs have maximum annual amounts you can contribute, which the IRS determines. Employers can also determine FSA limits for their plans up to the IRS limits.
On average, according to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old individual may need $165,000 in after-tax savings to cover health care expenses.
If your employer contributes to your HSA or FSA on your behalf, this may impact how much you can contribute. To find out more, check out our guide to HSA contribution limits.
Your HSA belongs to you, not your employer
Even if you opened it through your company, your HSA (and everything inside of it) is yours forever—even if you leave your job. You can even use HSA funds to cover COBRA costs and health insurance premiums if you need to when you're unemployed. FSAs, however, are owned by your company, though you may contribute your own money to them. If you leave your job, you forfeit all funds in the account upon your departure, unless you enroll in COBRA.
You may have access to your FSA funds earlier in the year
Health care FSA funds are available to spend in their entirety at the beginning of your plan year. So if you decide to contribute $3,300 to your health care FSA account in 2025, that entire amount is there for you to spend on the first day your benefits begin.
HSA contributions, on the other hand, accumulate only as you contribute. If you plan to save $3,300 over the year, you may only have access to half of that by the end of June, which may make it harder to cover significant expenses. However, HSAs let you reimburse yourself for any qualified medical expenses, which can make them effectively work the same way as FSAs.
For example, let's say you charge a $1,200 medical bill to your credit card because you don't have enough funds in your HSA. You can pay yourself back when your HSA balance grows enough to cover the cost.
At 65, you can treat an HSA like a traditional 401(k) or IRA
To avoid a 20% penalty—plus any applicable taxes—you should only use money held in FSAs and HSAs for qualified medical expenses. But starting at 65, the 20% penalty is waived for HSAs, making them effectively like traditional 401(k)s or individual retirement accounts (IRAs). If you choose to use HSA funds for ineligible expenses at age 65 or older, you will still owe any applicable income taxes on what you take out.
| Major differences between HSAs and FSAs | HSA | FSA |
|---|---|---|
| You can spend the money on qualified medical expenses. | Yes | Yes |
| 100% of your unused funds carry over year to year. | Yes | |
| You can invest the money for potential tax-free growth. | Yes | |
| Your contributions may be pretax. | Yes | Yes |
| Your contributions may be tax-deductible. | Yes | |
| Your account belongs to you, not your employer. | Yes | |
| You can contribute more if enrolled in family coverage than individual coverage. | Yes | |
| 100% of your elected amount is available on day one. | Yes | |
| You must have an HSA-eligible health plan as your only health insurance. | Yes | |
| You must be enrolled in the plan through your employer. | Yes | |
| You can use the funds for qualified medical expenses in retirement. | Yes |
HSA vs. FSA: Which is better?
If you're eligible for both an HSA and FSA, be sure to carefully weigh each option, considering the pros and cons we've outlined above. The choice of HSA vs. FSA (or HSA plus limited purpose FSA) comes down to your personal financial situation as well as your and your family's health.
And if you don't have a choice between HSAs and FSAs due to your health plan or company's offerings, don't worry about which account may be optimal. Both HSAs and FSAs are great options for saving money to pay for qualified medical expenses.