The Money Muse

As you work toward improving your financial wellbeing, understanding health savings accounts is crucial – especially if you have a high-deductible health plan. If you’re trying to navigate healthcare costs, two important types of accounts are the FSA (Flexible Spending Account) and HSA (Health Savings Account). Both offer tax advantages, but they operate differently and come with distinct rules, so it’s essential to know which one is right for you.

What is an FSA (Flexible Spending Account)?

An FSA is an employer-sponsored account that allows you to set aside pre-tax money for qualifying medical expenses. The funds you contribute can be used for a variety of healthcare costs like copays, prescription drugs, medical procedures, dental care, and vision expenses.

Key features of an FSA:

• Pre-tax contributions. The money you contribute to an FSA is deducted from your paycheck before taxes, which lowers your taxable income and reduces your overall tax burden.
• Use it or lose it. One of the biggest drawbacks of an FSA is the “use it or lose it” rule. This means that if you don’t use the funds in the account by the end of the year, you’ll forfeit the remaining balance. Some employers offer a small grace period or allow you to roll over a portion of the balance to the next year, but these options vary by plan.
• Contribution limits. In 2025, the contribution limit for an FSA is $3,300, but your employer may set a lower limit.
• No deductible requirement. Unlike HSAs, you don’t need to have a high-deductible health plan to qualify for an FSA. Most employees are eligible for an FSA through their employer.

What is an HSA (Health Savings Account)?

An HSA is another type of tax-advantaged account, but it is available only to people who are enrolled in a high-deductible health plan (HDHP). Like an FSA, it allows you to set aside pre-tax dollars for medical expenses. However, there are significant differences in how you can use the funds and the benefits it provides.

Key features of an HSA:

• Pre-tax contributions. Just like an FSA, HSA contributions are made with pre-tax dollars, lowering your taxable income. Additionally, the money grows tax-free in the account and is not taxed when withdrawn for eligible healthcare expenses.
• Roll over funds. Unlike FSAs, HSAs do not have a use-it-or-lose-it policy. The funds in an HSA roll over from year to year, allowing you to accumulate money over time.
• Contribution limits. For 2025, the annual contribution limit for an HSA is $4,350 for individual coverage and $8,550 for family coverage. If you’re older than 55, you can contribute an additional $1,000 as a catch-up contribution.
• Tax advantages. An HSA offers a triple tax benefit: your contributions are tax-deductible, the money grows tax-free, and you can withdraw it tax-free for qualified medical expenses.
• Eligibility. To qualify for an HSA, you must be enrolled in an HDHP. Your plan must meet certain criteria to be considered “high-deductible,” including a minimum deductible amount and a cap on out-of-pocket expenses.

FSA vs. HSA: What’s the difference?

Feature	FSA	HSA
Eligibility	Available to most employees, regardless of health plan	Available only to those with a high-deductible health plan (HDHP)
Contribution limits (2025)	$3,300	$4,300 (individual), $8,550 (family)
Tax advantages	Pre-tax contributions, tax-free withdrawals for medical expenses	Triple tax advantage: Pre-tax contributions, tax-free growth, tax-free withdrawals
Rollovers	Use-it-or-lose-it rule, though some plans allow a small rollover or grace period	Funds roll over year to year
Qualified expenses	Medical, dental, vision, and sometimes dependent care	Medical, dental, vision, and some other health-related expenses (including long-term care)

Which one should you choose?

When deciding between an FSA and an HSA, the best option depends on your personal healthcare situation and financial goals:

• If you’re enrolled in a high-deductible health plan and want to accumulate savings for future medical expenses, an HSA might be the best option for you. The ability to roll over funds and grow your balance over time makes it a powerful tool for long-term savings.
• If you don’t have access to a high-deductible health plan or are simply looking for a short-term way to manage medical costs, an FSA can be a great option. However, you’ll need to be mindful of the annual “use it or lose it” policy to avoid forfeiting funds.

How to use your HSA or FSA to your advantage

1. Maximize contributions. If possible, contribute the maximum allowed each year to take full advantage of the tax benefits.
2. Plan ahead. Estimate your healthcare expenses for the year and contribute accordingly. This will help you avoid underfunding your account and ensure you’re not caught off guard by medical costs.
3. Invest your HSA funds. If you have an HSA, consider investing the funds in a low-cost index fund. This allows your money to grow tax-free over time, and you can use it for future medical expenses.

FSAs and HSAs are both valuable tools for managing healthcare expenses and lowering your taxable income, but they work in different ways. Understanding the key differences can help you make an informed decision about which one best suits your needs. Whether you’re trying to save for short-term medical costs with an FSA or build a tax-advantaged health fund for the future with an HSA, both accounts offer unique benefits that can help you take control of your healthcare finances.