FSA vs. HSA: What's the Difference?

Employee Benefits
Article
6 min. Read
Last Updated: 03/15/2022

Employee uses work FSA account to pay for daughters eyeglasses

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Employees' healthcare insurance needs may vary, but most U.S. workers look to their employer to provide this important benefit. In addition to health insurance, businesses may also want to offer additional health and wellness programs to attract and retain talent. Flexible spending accounts (FSAs) and health savings accounts (HSAs) are two options that allow employees to pay for medical expenses with pre-tax dollars. When evaluating the alternative features of an FSA vs. HSA, employers should estimate employee utilization and the relative costs and benefits of each.

What Is an HSA?

An HSA is an employee-owned health savings account where pre-tax dollars may be deposited and used to pay for qualifying medical expenses. Employees may set aside a specified amount from their paycheck and divert the funds into an HSA if they participate in a qualified high-deductible health plan (HDHP). Employers may also contribute funds to an HSA. One important feature of an HSA is transferability. Because an HSA belongs to the employee, any remaining balance remains with them when they leave the company. Also, unused funds in an HSA can be rolled over from one year to the next.

What Is an FSA?

An FSA is a flexible spending account that gives employees the opportunity to contribute pre-tax dollars throughout the year and use them to pay for qualifying medical expenses. FSAs are owned by employers, who may also contribute to the account on the employee's behalf. Employees do not need to participate in a HDHP to contribute to an FSA. However, the funds are not transferrable if they leave the company. FSAs also have limitations on the amount and timing of reimbursement. If all funds are not used at the end of the year, employers may choose to provide a grace period or allow for a specific amount of unspent funds to be carried over to the following year.

Read more about the features of FSAs and HSAs.

*Please note, the discussion of FSA in this article refers specifically to Medical FSA, not Dependent Care FSA.

FSA vs. HSA Comparison Chart: How Do These Accounts Differ?

The relative benefits of FSAs vs. HSAs may make one a better choice for an employee based on their individual situation. In the midst of benefit negotiations, employees may request one type of account over the other. Businesses will want to weigh factors such as administrative costs and expected utilization before choosing to implement one or both plans.

	FSA	HSA
Contribution Limits	$2,850 in 2022	$3,650 per individual and $7,300 per family in 2022
Account Ownership	Employer owns the account and unused funds revert to them	Employee owns the account and may carry the funds to a new job
Eligibility	Benefits-eligible employees Employers must comply with IRS requirements that may restrict the participation of highly compensated or key employees Self-employed individuals, partners of a partnership, LLC members, and more-than 2% shareholders of an S-Corporation may not participate in an FSA, however, they may provide an FSA for their employees	Employees participating in a qualifying HDHP Self-employed individuals, partners of a partnership, LLC members and more-than 2% shareholders of an S-Corporation may open an HSA, but contributions are made on an after-tax basis
Eligible Expenses	Qualifying medical expenses as defined by IRS	Qualifying medical expenses associated with an HDHP as defined by the IRS
Rollover Rules	Participants are subject to the “use it or lose it” rules, which means that their FSA balance needs to be used prior to the end of the plan year. The exception to this is if an employer elects a grace period, which allows for an extension of time to incur expenses, or a carryover, which allows a specific amount to carry forward to the following plan year	No “use it or lose it” rules, contributions may accrue from year to year Since the account belongs to the employee, it remains with them in the event of a job change
Withdrawal Rules	Withdrawal permitted only for qualifying medical expenses	Tax-free withdrawals for qualifying medical expenses Additional withdrawals are taxed along with a 20% penalty for those under 65 Withdrawals for nonmedical purpose after age 65 are taxed at individual's current tax rate, but no penalty is assessed
Access to Funds	Full amount of annual contribution is available on the first day of the year, regardless of how much the employee has contributed	Funds available are limited to the amount the employee has contributed at the time of withdrawal
Reimbursement	Employee must provide a written statement from a third party validating the expense along with a statement claiming that the expense is not covered by any other healthcare plan Reimbursement permitted using debit cards, credit cards, stored value cards, checks, and direct deposit if amounts paid can be substantiated under IRS-approved methods	Account holders pay for expenses using a debit card or check linked to the HSA Account holders may also pay out of pocket and request reimbursement from the account
Option to Change Contribution Amount	Contribution amount is set at the beginning of the year and may not change unless a qualifying event occurs, such as a change in family status due to the birth of a child	Contribution amounts may be changed during the year as long as they do not exceed the maximum set by the IRS (Excess contributions are taxable, and subject to a 6% excise tax)

Which Is Better: FSA or HSA?

Although both plans offer tax savings for employees and employers, FSAs and HSAs each offer unique features and relative benefits. Depending on your employee demographics and healthcare utilization, one type of reimbursement account may work better for your business. Your choice of healthcare plan will affect your decision to offer an FSA vs. HSA. If your company does not offer a high-deductible health plan, an FSA is the only option.

Benefits of FSAs and HSAs

FSA Benefits

FSAs do not restrict the type of healthcare plan a company must offer. Also, unused funds are reverted to employers at the end of the year, or after a grace period. Employers gain tax savings related to employees' pre-tax contributions as they are not required to pay their share of Social Security tax on these amounts. In terms of employee satisfaction and retention, the small cost of administering an FSA often yields a valuable benefit for employees who choose to participate.

HSA Benefits

Offering an HSA in conjunction with an HDHP will generally yield cost savings for businesses compared to traditional health care plans, because an HDHP is a less expensive option. Like FSAs, HSAs also result in tax savings for employers. Additionally, HSAs offer potential retirement benefits to employees when unused funds are carried over and may be taxably withdrawn for nonmedical expenses when participants reach age 65.

Challenges of FSAs and HSAs

FSA Challenges

FSAs have a lower contribution limit compared to HSAs, which reduces their comparative tax savings. Unused funds generally may not be carried forward. FSAs are also managed by the employer and are subject to some of the limitations of fringe benefits programs.

HSA Challenges

HSAs are offered only to employees participating in an HDHP. This limits the type of healthcare plans you may choose to offer if your company wishes to provide access to an HSA.

Can You Offer Both an FSA and an HSA?

Companies can offer both types of plans, but participants will need to choose one over the other for medical expense reimbursements. A limited FSA plan may be offered for HSA participants wishing to set aside extra funds for dental and vision expenses not covered by an HDHP.

Choosing the Healthcare Plan That's Right for Your Business

Your choice between an FSA or HSA often comes down to the type of healthcare plans you want to provide. If you offer an HDHP, an HSA will allow for larger contributions and additional flexibility to carry over funds from year to year. If you find that an HDHP does not make sense for your employee base, sticking with a traditional healthcare plan and offering an FSA may yield better utilization and employee satisfaction. Whether you choose one type of plan, or both, FSAs and HSAs offer important benefits that will help employers and employees manage the rising cost of health care.

If you need further assistance, Paychex Employee Benefits Services is ready to help you navigate the complexity of healthcare plans. We can work with you to weigh the relative costs and benefits of the many options available.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.