HSA vs. FSA: What's the Difference?

Health savings accounts (HSAs) and flexible spending accounts (FSAs) are two common savings vehicles that can help you manage your medical costs. Yet, many people don’t understand how each account works or which one is best for them. Depending on which you choose, the differing contribution limits, tax advantages, and other characteristics of HSAs and FSAs can impact your savings and financial health in different ways.

In this article, we'll explain the key differences between these two tax-advantaged accounts to help you make smart choices about your healthcare spending. We'll also go over a third option that can help you save big on out-of-pocket medical expenses.

In this blog post, you'll learn the following:

How HSAs and FSAs differ in who owns the account, who can use them, and how much you can contribute.

The primary differences between HSAs, FSAs, and HRAs.

Why an HRA may be the better solution for healthcare savings.

Get our guide on how to offer health benefits with a small budget.

DOWNLOAD

What is an HSA?

An HSA is a type of savings account. It lets you set aside pre-tax dollars to pay for qualified medical expenses. You can either open an HSA as an individual or get one through your employer. You must have a qualified high deductible health plan (HDHP) to open and contribute to an HSA. Regardless of how the HSA is set up, it always belongs to the individual employee, even if an employer sets it up or contributes funds to it.

What is an FSA?

A flexible spending account (FSA), also known as a flexible spending arrangement, allows employees to use pre-tax dollars to cover their qualifying medical costs. Only employers can set up these accounts. A healthcare FSA, or medical FSA, is the most popular type of FSA. But, there are also FSAs for dependent care expenses and adoption assistance.

How do HSAs and FSAs compare?

The chart below highlights the biggest differences between HSAs and FSAs.

	HSA	FSA
Account ownership	Individuals own their HSAs, which means that the funds remain with them even if they change jobs or retire.	An FSA is employer-owned. The employee forfeits their funds if they leave the company.
Eligibility requirements	To contribute to an HSA, individuals must have a qualifying HDHP and have no other health coverage. However, you can use HSA funds that have already been contributed at any time, regardless of your current health plan	Any employee can participate in an FSA, regardless of their health insurance plan.
Contributions limits	The IRS sets annual contribution limits for HSAs. In 2025, you can contribute up to $4,300 for single employees and $8,550 for those with a family. People 55 and older can also make catch-up contributions.	The IRS sets annual contribution limits for FSAs¹. For 2025, employees can contribute up to $3,300 in salary deferrals. People 55 and older can also make catch-up contributions.
Rollover rules	HSAs allow for unused funds to roll over from year to year without limit. This means any unused money remains in the account for future medical expenses.	FSAs typically use a "use-it-or-lose-it" policy. However, some plans may offer a grace period or allow a limited rollover for unused funds. For 2025, individuals can roll over up to $660.
Tax benefits	HSA contributions are tax-deductible, can grow tax-free, and qualified withdrawals for medical expenses are also tax-free.	FSA contributions are pre-tax, reducing taxable income. Withdrawals for eligible expenses are also tax-free.
Account investment	HSAs often provide the option to invest funds in stocks, bonds, or mutual funds. This can potentially increase savings over time.	FSAs typically don’t offer investment options since they're designed for shorter-term use.
Out-of-pocket expenses	Individuals can use HSAs for qualified medical expenses. HSAs have a broader list of eligible expenses, including some that may not qualify for FSAs.	Individuals can use FSAs for qualified medical expenses.
Funding sources	Both the employee and their employer can make contributions to an HSA.	FSAs are primarily funded through employee contributions with optional employer contributions.
Withdrawal flexibility	HSAs allow withdrawals for non-medical expenses after age 65 without penalty, though regular income taxes will apply.	FSAs restrict withdrawals to qualified expenses only.
Future use	Individuals can use their HSAs as a long-term savings tool for healthcare expenses during retirement.	FSAs are intended for immediate or short-term medical expenses incurred within the plan year.

Can I have an HSA and an FSA?

You can have both an HSA and an FSA, but the FSA needs to be limited-purpose. With a limited-purpose FSA, employees can pay for qualified vision care and dental expenses. They can’t use their FSA to pay for medical expenses, since employers provide it to complement a health savings account (HSA).

A third option: HRAs

If you’re an employer looking to offer health benefits to employees, HSAs and HSAs have one big disadvantage: they don’t replace health insurance. Instead, they supplement your employee benefits package.

If you’re looking for an alternative to group health insurance, there's another option that might work for you. Health reimbursement arrangements (HRAs) are employer-funded health benefits. They can reimburse a wide range of qualified health expenses, including individual health insurance premiums.

Some other examples of HRA-eligible expenses include:

Monthly premiums for individual health, vision, and dental plans
Vision expenses such as eye exams, prescription glasses, or contact lenses
Dental expenses like routine cleanings, treatments, or braces
Doctor visits
Prescription drugs
Over-the-counter medication
Chiropractic visits
Mental health counseling

Since HRAs are fully funded by employers, employees don't contribute to these health benefits. That makes this type of plan more appealing for employees who may have limited disposable income. Additionally, HRA funds are tax-deductible for employers and tax-free for employees.

The reimbursement process for an HRA is often simpler and handled through an employer's payroll system. It's even easier if the employer works with an HRA administration software provider like PeopleKeep. We help thousands of organizations with all the details of HRA administration.

Employers can administer three types of HRAs through PeopleKeep:

The qualified small employer HRA (QSEHRA): The QSEHRA is for small employers with fewer than 50 full-time equivalent employees (FTEs) who don't offer a group plan. There are annual limits on contributions with a QSEHRA. Employees must have minimum essential coverage (MEC) to participate.
The individual coverage HRA (ICHRA): The ICHRA is available to organizations of all sizes. However, employees need their own individual health insurance policies to participate in this benefit. There's no limit on employer contributions with an ICHRA.
The group coverage HRA (GCHRA): The GCHRA, also known as an integrated HRA, works alongside a traditional health plan. Many employers offer it alongside an HDHP to help employees with additional expenses that the group plan doesn't cover or fully pay for.

Conclusion

With increasing healthcare costs, more people are looking for ways to save money while securing quality medical care. HSAs and FSAs offer unique benefits that can help you manage your medical costs effectively. However, there are major differences between them. This means choosing the wrong option can lead to missed opportunities for savings.

An increasingly popular option for healthcare savings is an HRA. HRAs are often better than HSAs or FSAs because they're employer-funded, have fewer rules on reimbursements, and offer tax benefits. An HRA specialist can help you determine which one is the best fit for your team.

IRS Revenue Procedure 2024-40

See what makes HRAs different from HSAs and FSAs in our easy-to-follow chart.