Health savings accounts (HSAs) and flexible spending accounts (FSAs) both let you set aside money for medical costs without paying income tax on it. But they work very differently.
Side by side
| HSA | FSA | |
|---|---|---|
| Who can open one | People enrolled in a qualifying high-deductible health plan (HDHP) | Employees whose employer offers one |
| Who owns it | You | Your employer |
| Unused money | Rolls over every year, forever | Mostly forfeited at year end (limited carryover or grace period if offered) |
| Can be invested | Yes, once you meet the provider's minimum | No |
| Keep it if you change jobs | Yes | No |
| Change contributions mid-year | Yes, anytime | Usually only with a qualifying life event |
How an HSA works
To contribute to a health savings account, you must be enrolled in a qualifying high-deductible plan and not have other disqualifying coverage, such as Medicare. HSAs have three tax advantages, all spelled out in IRS Publication 969:
- Contributions are pre-tax or tax-deductible.
- Growth from interest or investments isn't taxed.
- Withdrawals for qualified medical expenses are tax-free.
The account is yours: it stays with you if you change employers, and the money stays in it until you use it. That's why many people use an HSA as a long-term account for health costs in retirement. Keep your receipts and explanations of benefits to show what each withdrawal paid for.
How an FSA works
A flexible spending account is offered through your employer and works with most health plans. You choose an amount at open enrollment, and it's taken from each paycheck before taxes. The full yearly amount is usually available on day one, which helps if you have a big expense early in the year.
The catch: plan carefully. Money left at the end of the year is generally lost unless your employer offers a carryover (capped by the IRS) or a grace period. HealthCare.gov's FSA overview covers the basics.
Which one fits you?
- Choose an HDHP with an HSA if you're generally healthy, can cover the higher deductible, and want to build savings for future medical costs.
- Use an FSA if your plan doesn't qualify for an HSA and you have predictable expenses like prescriptions, glasses or orthodontics.
Worried about a big deductible before your HSA has grown? Compare building savings with what a supplemental health plan would actually pay.
IRS limits change every year, so check the current contribution limits before you set your amount.
Want to understand the plan side first? See how health insurance works.
