What’s the difference between an HSA and an FSA?

Among your choices when selecting workplace benefits is whether to opt for a health savings account or a flexible spending account. Both are health-related and offer tax savings, but are quite different.

A flexible spending account, or FSA, allows employees to divert money from their paycheck to spend on health-related expenses. It can be used directly for healthcare costs, but also for things like eyeglasses, contact lens solution, or over-the-counter medications. The list of eligible expenses is long.

The advantage is that FSA contributions are tax-free, meaning they lower your taxable wages. So whatever tax bracket you’re in, it’s roughly equivalent to saving that much on every FSA dollar you spend. A downside is that you must use FSA funds within the calendar year, meaning anything unspent on December 31 is forfeited.

A health savings account, meanwhile, is available to those choosing a high-deductible health plan. Money put in an HSA can also be spent on a long list of health-related expenses, and contributions are similarly tax-free, lowering your tax bill. Some employers even add funds to employee HSAs.

Where HSAs really shine is in offering two more tax benefits. First, you can save or invest the money instead of spending it right away, and any growth is untaxed. Withdrawals for eligible expenses are also tax-free. This makes HSAs not only great for current health expenses, but also a tax-savvy vehicle to save for expenses you’ll incur in retirement.

Unlike the “use it or lose it” nature of FSAs, HSA funds are yours to keep, even if you leave your job or change insurance plans. You can also contribute much more to HSAs. Limits change annually, but the individual HSA cap is substantially higher than for FSAs, and with family coverage, HSA limits are more than double the FSA limits.