FSA vs. HSA: What’s the Difference?

Think fast: If asked to explain the difference between health savings accounts (HSAs) and flexible spending accounts (FSAs), would you really know the answer?  

Many of us don’t. While HSAs and FSAs are both tax-advantaged options that share other similarities—including very similar acronyms—there are important differences between the two. We’ll help you understand the major differences between HSAs and FSAs so you can decide which account is right for you and your family.  

What is an HSA?  

A health savings account (HSA) is a tax-advantaged account that allows you to save for medical expenses. With an HSA, you (and your employer) contribute pre-tax dollars, which can be used to cover qualified medical expenses. Contributing to an HSA allows you to stretch your money even further, because these contributions also lower your federal taxable income.  

 Who can open an HSA? 

Not everyone can contribute to an HSA. To qualify, you must be enrolled in a high-deductible health insurance plan (HDHP). In 2023, these plans are defined as having a minimum annual deductible  of $1,500 for an individual plan and $3,000 for a family plan. In addition, yearly out-of-pocket expenses can be no more than $7,500 for an individual and $15,000 for a family plan.  

Additionally, to be eligible for an HSA:  

• You cannot have any other health insurance; 

• You cannot be enrolled in Medicare; and 

• You cannot be claimed as a dependent on someone else’s tax return.  

HSA contribution limits 

In 2023, people can contribute up to $3,850 annually to their individual HSAs or $7,750 to a family plan. If you’re 55 and older, you can also contribute an additional $1,000 as a catch-up contribution.  

To adjust for rises in the cost of living, in 2024, these limits will grow to $4,150 for an individual and $8,300 for a family. (Those 55 and over will still be able to contribute a $1,000 catch-up contribution.) 

If you exceed the annual contribution limit, you may be subject to a 6 percent tax on the funds you overcontributed that year (and in any following years until you remove the funds).  

How does an HSA work?  

As with most accounts, you’ll deposit funds into an HSA that you’ll be able to access later. However, there are some differences in how you make these deposits and how you can use them.  

If you qualify for an HSA, you can typically fund it directly from your paycheck with pre-tax funds (your employer can also make contributions). Usually, you’ll have until the tax filing deadline (this year, it’s April 15, 2024) to make any contributions for that year.  

How to use an HSA 

Once the money is in the account, it’s yours to use whenever you need it, as long as it’s spent on qualified health care expenses. 

Qualified medical expenses can include the following:  

• Doctor visits, deductibles and co-pays 

• Counseling services (such as therapy) 

• Prescription medications 

• Medical supplies, such as bandages, gauze, etc.  

• Eyecare (such as glasses or contact lenses) 

• Dental care (such as braces and dentures) 

• Orthotics  

If you are under 65 and you use HSA funds for anything not deemed as a qualified medical expense, you will have to pay a 20 percent penalty as well as income taxes on the funds. However, one benefit of having an HSA is that if you’re 65 or older, you’re able to use HSA funds for whatever you’d like, penalty-free. (You will, however, still have to pay income taxes on the funds.)  

Another perk of an HSA is that you can retain your funds indefinitely, meaning you don’t have to use up all your funds in one year (as you would with an FSA). This can be especially helpful if you want to save up for bigger medical expenses (short-term needs like childbirth or longer-term needs like a knee replacement).  

Investing in your HSA 

Some people choose to invest a portion of the money in their HSAs, allowing it to grow over time, and then use the money for health care in retirement. This strategy has a triple-tax benefit, because the money goes into the account tax-free, it grows tax-free, and you can withdraw it tax-free if it’s used for qualified medical expenses.  

How much you choose to invest is up to you; you can invest all of the funds you hold, or you can keep some cash for current expenses and invest the rest.  

What is an FSA?  

A flexible spending account (FSA), also occasionally called a flexible spending arrangement, is a tax-advantaged account that is used to reimburse yourself for qualified medical expenses. Like an HSA, an FSA can be funded by both you and your employer. The money goes into the account tax-free.  

Who can open an FSA? 

An FSA is typically established by your employer. In order to qualify for an FSA, your employer must offer it as part of your benefit package.  

FSA contribution limits 

As with an HSA, there are limits to how much you can contribute to an FSA. In 2023, contributions to an FSA are capped at $3,050.  

How does an FSA work? 

Typically, you’ll sign up for an FSA during your open enrollment period. As with an HSA, you can contribute pre-tax funds to an FSA by telling your employer to put a certain portion of your paycheck into the FSA. Depending on your benefit package, your employer also may be able to make contributions to your FSA. Because the funds in your FSA expire, you should put in about what you plan to spend. How you’re able to access these funds is one of the major differences between an HSA vs. FSA.  

How to use an FSA  

FSA funds can be used to pay for qualified medical expenses (like those listed above). However, unlike the funds held within HSAs, typically all of your FSA contributions must be spent in the tax year that you or your employers make the contribution. There are some cases, however, when some or all of your unused funds may roll over for a portion of the following year.  

One unique aspect of an FSA is that your entire contribution amount for the year is available to you (much like a cash advance) immediately, even though your payroll deductions will go through the end of the year. With an HSA, you are able to use only the amount that is currently in your account.  

FSA and investing 

Because whatever money you put into the account usually needs to be spent that year, you’re not able to invest FSA funds.  

The difference between an HSA vs. FSA 

Both the HSA and FSA allow you to save on medical expenses by using pre-tax dollars to pay for qualified expenses. However, there are some differences in how they work. Here are some of the major differences between an HSA and FSA:  

Can I have both an HSA and FSA?  

In some cases, you might be able to open both an HSA and an FSA. This is typically allowed only when the FSA is deemed “limited purpose,” which means that it can be used only for qualified dental and vision expenses and not general medical expenses.   

Can I switch from an FSA to HSA?  

As long as you are eligible, you can switch from an FSA to an HSA, but the funds belong to those individual accounts and cannot be transferred back and forth.  

How much should I put in my HSA/FSA?  

How much you choose to keep in your HSA or FSA (or both, if you’re eligible) will depend on your projected medical expenses. A good way to determine how much you’d like to put into your account is to look at your medical expenses from the prior year, adjusting for any planned medical events you may have in the coming year.  

You also may plan differently for an HSA vs. an FSA, keeping more in an HSA because of your ability to roll over funds and less in an FSA because you’ll lose funds at the end of the year if they’re not used.  

Ultimately, how much you contribute to either of these tax-advantaged accounts will depend on your monthly budget and overall financial plan. If you’re unsure how much to contribute, you may want to reach out to a tax professional or a Northwestern Mutual financial advisor, who can help make recommendations that will allow you to get the most out of your savings.  

  

This publication is not intended as legal or tax advice. Consult with a tax professional for tax advice that is specific to your situation.