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Flexible spending accounts (FSAs) and health savings accounts (HSAs) share similarities. Both are pre-tax accounts you contribute to, which you can use for various healthcare expenses—from doctor’s copays to first-aid supplies like Band-Aids.
However, they function distinctively. According to Forbes, an FSA is employer-sponsored, meaning it’s set up through your workplace and owned by your employer. If you don’t use up the balance by the year’s end, it’s lost (though grace periods may apply). Additionally, leaving your job means you forfeit the remaining FSA funds, unless a grace period is available in such cases.
On the other hand, some employers provide HSAs, but you can also open one independently, typically through a bank. It’s entirely yours to keep. The balance rolls over each year, and it remains yours even if you change jobs. However, not everyone is eligible for an HSA. You cannot be on Medicare, cannot be claimed as a dependent on someone else’s tax return, and must have a high-deductible health insurance plan (HDHP). The IRS defines the minimum deductible and maximum out-of-pocket expenses annually [PDF].
The IRS sets the annual contribution limits for both FSAs and HSAs. Generally, you can contribute more to an HSA. For example, the 2022 limit is $4,150 for an individual HSA, compared to $3,200 for an FSA. Typically, with an FSA, you choose an amount for the whole year, and it’s deducted from your paychecks in installments. However, as Aetna points out, it works like a credit system: You can spend beyond the amount currently in your account, as long as it’s within the total you’ve committed to contribute by the year’s end.
With an HSA, you can only spend what you’ve already deposited. If your HSA balance doesn’t cover a specific expense, you can pay using another method and reimburse yourself from your HSA later—there’s no deadline for filing a reimbursement. Additionally, you can earn interest on and even invest your HSA funds, while FSAs don’t offer these benefits.
Although HSAs might appear to have an advantage over FSAs, the right choice depends on your personal situation. For instance, your employer might contribute to FSAs but not HSAs, or perhaps you and your family have frequent doctor visits, making an HDHP less suitable for you.
