HSA vs. FSA: How to Choose One

Editor’s note: This article originally ran on May 2, 2020. It’s since been updated to reflect new data.

If you're looking to stretch your healthcare dollars further with powerful tax benefits, you might consider a health savings account or healthcare flexible spending account. With either one, you can elect for your employer to defer pretax dollars into the account. You can withdraw these funds tax-free to cover qualified medical expenses, which include dental, vision, and prescription costs.

FSAs and HSAs have some key differences, and even if you qualify for both, the IRS only lets you have one given their overlapping tax benefits. We compare these accounts to help you decide which one is better for your circumstances.

Health Savings Account: Key Details An HSA is an account that allows you to spend and invest money for healthcare expenses. You contribute pretax dollars to the account, and your invested money grows tax-free. You can also withdraw money tax-free if you use it for qualified medical expenses. You have flexibility with an HSA, including the ability to roll unspent funds into the next year and keep the account if you change employers or leave the workforce. (You can use Morningstar research to find the best HSAs, whether you plan to spend the money in the account now or invest it.)

However, not everyone is eligible for an HSA. To contribute to one, you must be enrolled in a health insurance plan that's considered to be a high-deductible health plan, which might not make sense for everyone. (We'll discuss this requirement in more depth later.)

Flexible Spending Account: Key Details Meanwhile, you can contribute pretax money to a healthcare FSA and use it to cover qualified medical expenses throughout the year. You can generally use an FSA alongside any health insurance plan if your employer offers the account as part of its benefits package, so if a lower-deductible health insurance plan makes sense for your circumstances, you could pair it with an FSA to minimize your healthcare spending.

However, FSAs also have more restrictions: You must decide how much you'll contribute at the beginning of the plan year, and you might forfeit any unspent money at the end of the year. You also usually lose the account if you leave your employer, and you cannot invest the money.

Your employer might offer some other FSA options. With a limited-purpose FSA, you can spend the account's funds on fewer healthcare expenses, primarily dental and vision costs, but you can pair it with an HSA under a high-deductible health plan. Your employer might also offer a dependent-care FSA, which covers childcare expenses for kids under 13, including before- and afterschool care, babysitting, daycare, preschool, and summer day camp. You can pair a dependent-care FSA with either an HSA or healthcare FSA under any health insurance plan.

HSA vs. FSA: Comparisons on Specific Topics Here's how HSAs and FSAs stack up on specific criteria, such as eligibility, contribution limits, and more.

Eligibility requirements: As previously mentioned, you must have a high-deductible health plan to qualify for an HSA. A deductible is the portion of your healthcare costs you must pay out of pocket before your insurance kicks in and begins covering expenses. In 2021, a high deductible is at least $1,400 for a self-only insurance plan and $2,800 for a family plan. (In addition to the high-deductible health plan requirement, you must meet some other requirements as well.) As Morningstar director of personal finance Christine Benz has discussed, it's helpful to run the numbers when assessing health options: Premiums are usually lower with high-deductible health plans, making them a logical choice for people who don't have a lot of healthcare expenses on an ongoing basis. But out-of-pocket costs may also be higher, so you must carefully consider whether a high-deductible health plan makes sense for you.

If you decide that a high-deductible health plan is not the right plan for you, you might consider pairing a lower-deductible healthcare plan with an FSA instead. To qualify for an FSA, your employer just needs to offer the account as part of its benefits package (which means self-employed workers cannot have an FSA).

Contribution maximum: You can generally contribute more money to an HSA than an FSA. In 2021, you can contribute up to $2,750 to your FSA (though your employer can set the contribution limit lower than this maximum). Your employer can also contribute to your FSA, and these contributions don't count toward your designated maximum.

With an HSA, you, your employer, and anyone else can contribute a combined maximum of $3,600 for a self-only insurance plan and $7,200 for a family plan. You can contribute an extra $1,000 to either a self-only or family HSA account if you're age 55 or older.

Contribution methods: When contributing to an FSA, you must decide how much your employer will defer from your salary at the beginning of the year. You usually cannot change this amount until the next year (unless you have a qualifying life event, such as marriage, or the birth or adoption of a child), so you should carefully consider whether your (and any employer) contributions are sufficient to cover your expenses.

With an HSA, by contrast, you can also set up automatic payroll deferrals, but you can alter how much you contribute throughout the year, which gives you greater flexibility. You can also transfer aftertax dollars into an HSA, like through a bank account. (You could then deduct the transfer amount from your taxable income if you're below the maximum contribution amount.)

Ability to roll over funds: With an FSA, you need to be careful not to contribute too much money. Under the FSA's use-it-or-lose-it provision, you can lose any money remaining in the account at the end of the year. (Some employers give you a few additional months to spend remaining funds or let you roll over up to $500 into the next year, however.)

With an HSA, you keep the money in the account until you use it. HSAs allow you to stockpile unused funds, which could be helpful if you have higher-than-anticipated medical expenses now or in the future. (HSAs also give you the ability to invest the money for future healthcare expenses; more on that below.)

When you can spend funds: While FSAs have rigidity around how much you contribute, they do have one nifty feature. You can spend your entire annual election whenever you want in the plan year, even if you spend more than what your employer has currently deferred from your salary. You might like this feature if you want to spend your entire annual election before covering expenses out of pocket.

Meanwhile, you can spend only up the amount that has been contributed to an HSA account. However, you can later reimburse yourself by transferring money out of the HSA once it's sufficiently funded if you save receipts from out-of-pocket healthcare expense.

Attachment to employer: You generally lose an FSA if you switch employers or leave the workforce. However, you may qualify to keep it under COBRA continuation coverage, which you might be eligible for if you lose your job.

Meanwhile, you can keep an HSA and any unspent funds if you change employers or leave the workforce.

Ability to invest funds: You can also invest money in an HSA but not an FSA. The HSA account offers a triple tax benefit: Money enters the account tax-free, grows tax-free, and can be withdrawn tax-free for qualified medical expenses. If you want to save a sizable nest egg for future healthcare expenses, you might like HSAs' investment feature.

You can use Morningstar research to find a good HSA for investing. We rate HSAs on various criteria, including fees, investment menu designs, the quality of underlying investments, and investment thresholds.