Article
9 min read
Difference Between HSA and FSA: How to Choose the Right Option
PEO
US payroll
Author
Shannon Ongaro
Last Update
April 11, 2025
Published
April 11, 2025
Table of Contents
HSA vs. FSA: Key differences at a glance
Eligibility criteria: Who can benefit from HSA and FSA plans?
Annual contribution limits for 2025
Account ownership and portability
Qualified expenses
Fund rollover rules
Investment and growth
Tax advantages
Retirement planning implications
Making the right decision: HSA or FSA for your workforce?
Implement the right account for your team's needs with Deel
Key takeaways
- Understanding the difference between HSA and FSA is crucial for employers to make informed decisions that positively impact both tax savings and employee satisfaction.
- Factors like eligibility, rollover rules, and investment options influence how each account meets employee needs and shapes their short and long-term financial planning.
- Deel simplifies benefits management through its PEO service and US payroll platform. We help employers offer HSAs and FSAs while ensuring compliance and optimizing benefits for both US and global teams.
The difference between HSA and FSA can significantly impact your benefits strategy as a US employer. You’ve probably heard of both, but understanding how each works is key to making the right choice for your team.
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are both tax-advantaged accounts. They allow employees to set aside money to pay for qualified healthcare expenses. However, they differ in eligibility, contribution limits, and rules around usage.
By understanding these differences, you can choose the right option to maximize tax savings, reduce employees' out-of-pocket costs for health care, and support long-term financial well-being. As an employer, this decision also helps control benefits costs and improve employee satisfaction.
Deel supports US and global employers with payroll and benefits management. Our compliance-driven PEO solution and US payroll platform make it easy to offer FSAs, HSAs, and other attractive benefits while staying compliant.
HSA vs. FSA: Key differences at a glance
| Feature | HSA | FSA |
|---|---|---|
| Eligibility | Must be enrolled in a High Deductible Health Plan (HDHP) | No specific health plan required |
| 2025 contribution limits | $4,300 USD (self-only) $8,550 (family) Additional $1,000 catch-up contribution for employees aged 55+ | $3,300 per employee Married couples can jointly contribute up to $6,600 if both have FSA accounts |
| Unused funds | Unused funds roll over year to year and stay in the account indefinitely | Unused funds are lost at the end of the plan year, unless a carryover or grace period applies |
| Tax benefits | Offers triple tax advantage: Pre-tax contributions Tax-free withdrawals for qualified expenses Tax-free growth on investments | Only offers: Pre-tax contributions Tax-free withdrawals for qualified expenses |
| Investments | Once the funds reach a minimum balance, an employee can access investment options | No investment options available |
| Account ownership and portability | The employee owns the account. They retain the account and balance even if they switch employers | The employer owns the account. The employee loses any unused funds in the FSA if they change jobs |
| Qualified expenses | Medical, dental, and vision expenses Over-the-counter expenses with prescription Medical equipment, supplies, and devices Transportation costs for medical care Deductibles and copayments Long-term care premiums Certain health insurance premiums, including: – Coverage under COBRA – Coverage under unemployment compensation | Medical, dental, and vision expenses Over-the-counter expenses with prescription Medical equipment, supplies, and devices Transportation costs for medical care Deductibles and copayments |
Eligibility criteria: Who can benefit from HSA and FSA plans?
An HSA helps employees with high-deductible health plans (HDHPs) save for healthcare costs. An FSA is more broadly available and can be used by employees regardless of their health plan.
Below is a breakdown of the 2025 eligibility rules.
| Criteria | HSA | FSA |
|---|---|---|
| Health plan requirement | Must be enrolled in a qualified High Deductible Health Plan (HDHP) For 2025: - Minimum deductible: $1,650 (self-only), $3,300 (family) - Maximum out-of-pocket: $8,300 (self-only), $16,600 (family) | No specific health plan required |
| Additional health coverage | Must not have other health coverage, except limited types such as: Coverage for a specific disease or illness Hospital indemnity or per diem plans Dental, vision, long-term care, accident, or disability insurance Telehealth or remote care services Coverage related to workers’ comp, tort claims, or property use | Can be enrolled in any health plan or none at all |
| Medicare enrollment | Not eligible if enrolled in Medicare | Still eligible, even if enrolled in Medicare |
| Self-employed eligibility | Eligible | Not eligible. FSAs must be offered through an employer |
Employees cannot contribute to both an HSA and a general health FSA in the same year. However, they can have an HSA and a Dependent Care FSA (DCFSA) in the same year. A Limited Purpose FSA (LPFSA) covering only dental and vision expenses is also allowed alongside an HSA.
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Annual contribution limits for 2025
For HSAs, the 2025 contribution limits are:
- $4,300 for self-only coverage
- $8,550 for family coverage
Individuals aged 55 or older can also make an additional catch-up contribution of $1,000. This allows for greater savings as they approach retirement.
Both employers and employees can contribute to an HSA in the same year. However, combined contributions cannot exceed the annual limit.
On the other hand, the 2025 annual contribution limit for FSAs is $3,300 per employee. If an employee and their spouse have access to FSAs through their respective employers, each may contribute up to $3,300, for a combined household total of $6,600.
Employers may also contribute to an employee's FSA. However, the combined total contribution amount must not exceed the annual limit of $3,300 per employee.
Unlike HSAs, FSAs do not allow catch-up contributions for individuals aged 55 or older.
Account ownership and portability
With an HSA, the employee owns the account, not the employer. This means the HSA is portable. If the employee changes jobs or leaves the workforce, the account and its balance stay with them. They can continue to use the funds for eligible medical expenses, regardless of employment status.
FSAs, by contrast, are employer-sponsored accounts. Employees can only participate if their employer offers the benefit. Because the employer owns the account, the employee loses the account and funds when they leave the company.
However, in some cases, employees may qualify for continued access under COBRA (Consolidated Omnibus Budget Reconciliation Act). COBRA allows a temporary extension of FSA access, usually for up to 18 to 36 months.
Qualified expenses
Employees can use FSA and HSA for medical expenses for themselves, spouses, or dependents. However, they cannot use the funds for expenses related to general health improvement.
For example, the employee cannot use FSA or HSA funds to pay for nutritional supplements unless prescribed by a doctor to treat a specific medical condition.
Here’s a breakdown of what employees can and cannot use their FSA and HSA funds for:
| Expense | HSA | FSA |
|---|---|---|
| Prescription medications | Yes | Yes |
| Non-prescription medication | No (except insulin) | No (except insulin) |
| Medical equipment, supplies, and devices | Yes | Yes |
| Dental care | Yes | Yes |
| Vision care | Yes | Yes |
| Transportation costs for medical care | Yes | Yes |
| Deductibles and copayments | Yes | Yes |
| Health insurance premiums | No, except: COBRA coverage Coverage while receiving unemployment compensation | No |
| Long-term care insurance | Yes | No |
HSA and FSA withdrawals for non-qualified expenses are subject to income taxes as per US payroll tax laws and an additional 20% penalty.
Fund rollover rules
FSAs operate under a use-it-or-lose-it rule, meaning employees lose any unused funds at the end of the plan year. However, there are two options to reduce forfeiture:
- Grace period: Employees can use remaining funds up to 2.5 months after the plan year ends
- Carryover: Employees can carry over up to $660 of unused funds to the next plan year. Any amount over $660 is forfeited
HSAs have no use-it-or-lose-it rule. Unused funds roll over automatically year after year and stay in the account indefinitely. The rollover amount does not affect the annual contribution limit.
Additionally, employees can invest unused HSA balances in IRA-approved options, such as stocks and bonds. However, many HSA providers require a minimum balance before investment options become available.
Investment and growth
As mentioned, HSAs provide investment opportunities, which is a key advantage for long-term financial planning.
Once the HSA reaches a minimum balance set by the provider, employees can invest the remaining funds in options such as mutual funds, ETFs, and other IRA-approved assets. This allows the account to grow over time, much like a retirement account.
Employees can use these earnings for future qualified medical expenses without triggering any taxes. Over the years, they can build a significant healthcare nest egg.
In contrast, FSAs don’t allow investment and growth of funds. Contributions remain static throughout the plan year.
Tax advantages
Both FSAs and HSAs offer pre-tax advantages. In each case, contributions are deducted from employees’ paychecks before taxes, lowering their taxable income and reducing their payroll taxes.
They both offer tax-free withdrawals as well. Employees can withdraw funds for qualified medical expenses without paying taxes.
However, HSAs offer a triple tax advantage. In addition to tax-deductible contributions and tax-free withdrawals, HSAs allow the account balance to be invested. Any earnings on those investments grow tax-free, unlike in a traditional investment account.
Example:
Scenario 1 - HSA:
An employee earns $60,000 a year and contributes $3,000 to a Health Savings Account.
- Pre-tax contribution: The $3,000 is deducted before taxes, reducing their taxable income to $57,000 and lowering the federal income tax owed
- Tax-free withdrawal: The employee uses $1,000 from the HSA to pay for a dental procedure. Since it's a qualified medical expense, the withdrawal is completely tax-free
- Tax-free growth: The employee invests $1,500 in mutual funds within the HSA. Over time, it grows to $2,000. The $500 in earnings is also tax-free
Scenario 2 - FSA:
The employee earns $60,000 a year and contributes $3,000 to a Flexible Spending Account.
- Pre-tax contribution: The employee’s taxable income is reduced to $57,000, just like with an HSA.
- Tax-free withdrawals: The employee uses $1,000 from the FSA to pay for a dental procedure. Similar to HSAs, the procedure is a qualified medical expense, so the withdrawal is tax-free.
However, unlike the HSA, there’s no option to invest the balance, meaning there’s no tax-free growth.
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Retirement planning implications
HSAs can be a smart tool for long-term retirement planning. At age 65, employees can withdraw funds contributed to an HSA for any reason without penalty, even if the expense isn’t medical. These non-qualified withdrawals are subject to income tax. However, withdrawals for qualified medical expenses remain tax-free, even after age 65.
FSAs don’t offer the same flexibility. After retirement, an employee loses access to their FSA. But they can still use any remaining FSA funds for qualified healthcare expenses incurred before their retirement date.
While an HSA account continues to serve the employee in retirement for both healthcare and other expenses, an FSA account ends once the employee retires.
See more details on HSAs and FSAs.
Making the right decision: HSA or FSA for your workforce?
Whether you're preparing for employee benefits open enrollment or evaluating your current benefits offerings, it's crucial to weigh each account's strengths and weaknesses against the needs of your employees and your company’s overall benefits strategy.
Here’s a quick summary to help guide your decision.
Health Savings Account (HSA)
Pros:
- Triple tax advantage for employees
- Offers investment opportunities for employees to grow savings
- Combines health benefits with retirement benefits
- No forfeiture of funds
Cons
- Strict eligibility requirements
- Employee education may be needed to help them understand how to use and invest their HSA funds
Flexible Spending Account (FSA)
Pros:
- Pre-tax advantage and tax-free withdrawals
- Broad eligibility; employees don’t need to be enrolled in a specific health plan
- Simple benefits for employees with predictable medical costs
Cons:
- The use-it-or-lose-it rule can lead to employee dissatisfaction due to funds lost at the end of the plan year
- Not portable. Employees who leave the company lose access to their FSA funds
- No investment or growth opportunities for the funds
When to choose an HSA vs. an FSA
For long-term savings:
If your goal is to offer employees a secure safety net for healthcare costs, both now and in the future, the HSA is a strong choice. It allows employees to contribute funds tax-free and invest them, offering potential for significant growth over time.
Additionally, unused funds remain in the account, even if the employee leaves the company. It enables them to continue saving money for future healthcare needs.
For immediate or short-term needs:
If your employees are likely to need quick access to healthcare funds for things like doctor visits and prescriptions, both HSA and FSA are suitable.
However, keep in mind that FSA funds don’t roll over at the end of the plan year, which can impact employees who don’t fully use their balance.
For broader employee coverage:
If your workforce doesn’t have many employees with HDHPs or if they are enrolled in Medicare, an FSA may be a more inclusive option. FSAs can be offered regardless of the employees’ health plans.
For a comprehensive benefits package:
An HSA is an excellent addition to a comprehensive benefits package, especially for employees planning for retirement. Retired employees can continue using their HSA funds for medical expenses and can also withdraw funds for non-medical expenses without facing a penalty. This makes the HSA a valuable complement to a 401(k) plan.
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HSAs and FSAs each offer valuable tax benefits and support employees in managing healthcare costs, but they address different needs.
- HSAs provide long-term savings and investment potential, making them an ideal choice for a financially savvy team focused on building savings over time
- FSAs cater to short-term medical expenses and offer broader eligibility, making them a good option for larger teams
Regardless of which option you choose, Deel PEO and Deel US Payroll simplify payroll, benefits, compliance, and all HR-related processes. Our payroll experts offer tailored guidance to help you provide the best benefits to your US employees while optimizing your overall benefits strategy.
Book a demo and see how Deel can transform your payroll and benefits management.
Disclaimer: This article is for informational purposes only and does not constitute legal, accounting, or tax advice. Seek the assistance of qualified professionals for personalized help with legal, tax, and accounting matters.
FAQs
Can I have both HSA and FSA?
No, an employee cannot have both an HSA and a general health FSA in the same year. However, they can contribute to both an HSA and a Dependent Care FSA (DCFSA) or a Limited Purpose FSA for dental and vision expenses.
What happens to FSA when I leave my job?
When you leave your job, you forfeit any unused FSA balance. However, you can still access money to pay for qualified medical expenses incurred before your departure.
Are HSA contributions tax deductible in 2025?
Yes. HSA contributions are tax-deductible in 2025 and offer a triple tax advantage:
- Pre-tax contributions
- Tax-free growth
- Tax-free withdrawals
What are the disadvantages of HSAs and FSAs?
HSAs have strict eligibility requirements. To qualify, an individual must be enrolled in a High Deductible Health Plan and cannot be enrolled in Medicare.
FSAs:
- Follow a use-it-or-lose-it rule, meaning an employee loses any unused funds at the end of the plan year
- Are not portable. Employees lose access to funds when they leave the company
- Do not offer investment options, so the balance does not grow over time
What happens to HSA money if you don't spend it?
Unused HSA funds roll over year to year and remain in the account indefinitely. You can use the funds for future qualified medical expenses and even invest them in IRS-approved options.
Can I use HSA for gym membership?
No, you generally cannot use HSA funds for gym membership dues. However, you can use them for weight loss programs or activities prescribed by a doctor for a specific medical condition, such as heart disease.
About the author
Shannon Ongaro is a content marketing manager and trained journalist with over a decade of experience producing content that supports franchisees, small businesses, and global enterprises. Over the years, she’s covered topics such as payroll, HR tech, workplace culture, and more. At Deel, Shannon specializes in thought leadership and global payroll content.
