Why would someone choose an FSA over an HSA in 2025?

Securing a job that offers comprehensive healthcare benefits is a common goal among many employees. You need good healthcare to be productive and accomplish your career goals. However, finding a plan that works for your specific needs can be a chore.

Part of the problem is the lack of options.

Most employers don’t offer flexible benefits packages that cater to a variety of needs the employees have.

Another issue is the value of benefits offered. If you can’t make sense of your employer’s healthcare package, you won’t be able to leverage the benefits to their full extent.

To find an employer with a healthcare package that works in your best interest, you must know what the plans are, and how they compare to each other.

Two of the most popular healthcare benefits plans are Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). Both of these account types can offset your healthcare bill with pre-tax dollars, but they work differently and have different pros and cons.

Understanding how FSAs and HSAs work and interact will help you get the most out of your employer-sponsored healthcare options. Let’s see how they stack against each other in more detail.

Key takeaways

• FSAs and HSAs are tax-advantaged accounts that can be used to cover qualified medical expenses with pre-tax dollars.
• FSAs have a number of perks that make them preferable to HSAs in some circumstances. The perks include immediate access to funds, no high-deductible health plan (HDHP) requirements, and easier account management.
• Both FSAs and HSAs help you pay less taxes. HSAs even offer triple tax advantage – contributions are tax-deductible, investment earnings are tax-free, and qualified withdrawals are tax-free.
• You can’t have a FSA and HSA at the same time. However, you can have a an HSA and LPFSA at the same time.

What is an FSA?

A Flexible Spending Account (FSA) is a tax-advantaged account that allows individuals to set aside pre-tax dollars to cover eligible out-of-pocket medical expenses. Employers can offer FSA as part of their employee benefits package. FSA contributions are deducted from your gross income, reducing your overall tax liabilities.

FSA funds can be used for various qualified medical expenses, including co-payments, deductibles, prescription medications, and certain medical supplies. The contribution limit for an FSA is set by the IRS on an annual basis, and for 2025 it’s $3,300.

Unused funds at the end of the plan year are automatically forfeited, following the "use it or lose it" rule. Some employers may allow a grace period or a limited carryover of funds to the next plan year.

Common eligible expenses include doctor visits, dental and vision care, and prescription eyeglasses. FSAs offer a valuable financial tool for employees to manage healthcare costs efficiently while enjoying the immediate tax benefits provided by these accounts.

What is an HSA?

A Health Savings Account (HSA) is also a tax-advantaged financial account designed to help employees save for qualified medical expenses. Unlike FSAs, HSAs are available to employees with a high-deductible health plan (HDHP). HDHPs typically have higher deductibles and lower premiums than traditional health insurance plans.

Contributions to an HSA are made with pre-tax dollars, meaning they are deducted from the employee’s gross income, leading to immediate tax savings. HSA funds can be invested, and any interest or investment gains earned within the account are tax-free. Importantly, unlike FSAs, HSA funds can roll over from year to year, allowing for long-term savings and the potential to accumulate a substantial balance over time.

HSA funds can be used to cover a wide range of qualified medical expenses, including co-payments, deductibles, prescription medications, and certain preventive care services. Additionally, individuals aged 65 and older can withdraw funds for non-medical expenses without penalty, although regular income tax may apply.

Overall, HSAs offer a powerful combination of tax advantages, investment opportunities, and flexibility, making them an attractive option for individuals seeking to proactively manage their healthcare costs while planning for the future.

FSA and HSA comparison table

The easiest way to grasp the differences between FSAs and HSAs at a glance is with a table. Let’s take a look.

Note that FSAs are sometimes called Healthcare Spending Accounts. This terminology is less common and often causes confusion because the acronym is the same for Health Savings Accounts.

Why would someone choose an FSA over an HSA?

In general, you can’t have an FSA and an HSA simultaneously.

You have to choose one of the two options, provided your employer offers both.

1. Lower eligibility barrier

FSAs are more accessible to a broader population as they do not require enrollment in an HDHP, a prerequisite for HSAs.

This lower barrier to entry makes FSAs an inclusive option, allowing employees, regardless of their specific health coverage, to benefit from the tax advantages associated with pre-tax contributions.

2. Use-it-or-lose-it rule

Since FSAs are subject to the use-it-or-lose-it rule, they cater well to individuals with predictable short-term medical expenses.

While there is a risk of forfeiting unused funds at the end of the plan year, this structure aligns with those who can accurately estimate their healthcare spending, offering a tailored approach to financial planning for immediate medical needs.

3. No HDHP requirement

Unlike HSAs, which mandate participation in a HDHP, FSAs have no such requirement. This makes FSAs a more flexible choice for employees who prefer or are limited to traditional health insurance plans.

The absence of a specific insurance plan commitment enhances the versatility of FSAs as a financial tool for various healthcare needs.

4. Convenience for short-term commitments

Individuals in transitional phases, such as job changes or anticipating shifts in healthcare needs, may find FSAs more suitable.

The annual commitment and potential forfeiture of unused funds align well with those looking for a pragmatic and short-term financial planning solution. FSAs provide flexibility for employees with evolving healthcare requirements who may not want to commit to long-term savings strategies.

5. Employer plan limitations

Some employers may only offer FSAs or may have limitations on HSA availability within their benefits packages.

In such cases, employees might choose an FSA based on the options provided by their employer. Employer-sponsored plan limitations play a crucial role in the decision-making process, directing individuals toward the available option, whether it be an FSA or HSA.

6. Limited interest in long-term savings and investment

For those primarily interested in immediate tax savings and with limited interest in using the account for long-term savings or investment, an FSA may be the more straightforward choice.

FSAs are designed for shorter-term financial planning, catering to immediate healthcare needs without the complexities associated with investment strategies and long-term savings goals seen in HSAs.

Employees with a focus on current tax advantages and short-term financial planning may find the simplicity of an FSA better suited to their preferences.

HSA vs FSA taxes: how do they compare?

HSAs and FSAs both offer tax advantages, but their structures and tax implications differ. Here's a comparison of HSA vs. FSA taxes:

HSA taxes

Contributions to an HSA are made with pre-tax dollars, meaning they are deducted from your gross income. This reduces taxable income for the year in which the contribution is made.

Any interest, dividends, or capital gains earned within the HSA are tax-free. The account can be invested, allowing for potential growth over time without incurring additional taxes.

Withdrawals from an HSA for qualified medical expenses are tax-free. This includes expenses such as doctor visits, prescription medications, and certain preventive care services.

Unlike some other tax-advantaged accounts, such as Traditional IRAs or 401(k)s, HSAs do not have required minimum distributions (RMDs). This means there is no mandatory withdrawal of funds at a certain age, allowing individuals to let their HSA funds continue growing tax-free for as long as needed.

Withdrawals for non-qualified expenses before age 65 incur a 20% penalty, in addition to being subject to regular income tax. After age 65, non-qualified withdrawals are only subject to regular income tax.

HSAs are often referred to as offering triple tax advantages. Contributions are tax-deductible, earnings on investments are tax-free, and qualified withdrawals for medical expenses are tax-free. This combination makes HSAs a unique and powerful tax-advantaged savings vehicle.

FSA taxes

Contributions to an FSA are also made with pre-tax dollars, reducing your taxable income for the year. This provides an immediate tax benefit.

An FSA additionally lowers the payroll taxes you need to pay. Your income, which is subject to payroll taxes including Medicare and Social Security taxes up to specific limits, is impacted by this reduction. This exemption further enhances the overall tax advantages of using an FSA.

Withdrawals from an FSA for qualified medical expenses are tax-free. These expenses include co-payments, deductibles, prescription medications, and certain medical supplies.

One unique aspect of FSAs is the use-it-or-lose-it rule. Any unused funds at the end of the plan year may be forfeited, although some plans may offer a grace period or a limited carryover amount.

Unlike HSAs, FSAs typically do not allow for investment options, and the funds are held in an account without the potential for additional growth through investment returns.

Can you have an FSA and an HSA?

In general, you cannot have HSA and a FSA at the same time. However, that changes if the FSA is a Limited-Purpose FSA or a Post-Deductible FSA.

Let’s briefly go over these two arrangements

Limited-Purpose FSA

A Limited-Purpose FSA is designed to cover only specific eligible expenses, such as dental and vision expenses. If an employer offers a Limited-Purpose FSA, individuals can contribute to both the HSA and the Limited-Purpose FSA simultaneously.

Post-Deductible FSA

Some employers offer a Post-Deductible FSA, which becomes active only after the individual has met the minimum deductible requirements of their High Deductible Health Plan (HDHP). Once the deductible is met, the FSA can be used to cover qualified medical expenses.

Which is better? FSA or HSA?

The choice between a FSA and a HSA depends on your circumstances, preferences, and financial needs. Both options offer distinct advantages and drawbacks, and the suitability of each varies based on factors such as eligibility, financial goals, and risk tolerance. Here's a balanced overview of the pros and cons of each:

FSA pros

• Immediate access to funds – FSAs provide immediate access to the full annual contribution at the beginning of the plan year, offering quick financial assistance for medical expenses.
• Lower eligibility barriers – FSAs are available without the requirement of a HDHP, making them more inclusive for a broader range of employees.
• Use-it-or-lose-it rule – While it may be seen as a drawback, the use-it-or-lose-it rule can encourage better budgeting and planning for predictable short-term medical expenses.

FSA cons

• Limited rollover – FSAs typically have limited rollover options, and any unused funds at the end of the plan year may be forfeited, although some plans offer a grace period or a limited carryover amount.
• No tax-free growth – Unlike HSAs, FSAs do not provide the opportunity for tax-free growth through investments. The funds are used for immediate medical expenses without the potential for additional earnings.

HSA pros

• Tax-free contributions – Contributions to HSAs are made with pre-tax dollars, reducing taxable income and providing an immediate tax benefit.
• Tax-free growth – HSA funds can be invested, allowing for potential tax-free growth through interest, dividends, or capital gains. This feature makes HSAs advantageous for long-term savings.
• Portability – HSAs are portable and can be carried over from job to job and into retirement, providing continuity and flexibility in managing healthcare expenses.

HSA cons

• HDHP requirement – To qualify for an HSA, individuals must be enrolled in a HDHP, which may have higher out-of-pocket costs and may not be suitable for everyone.
• Potential penalties for non-qualified expenses – Withdrawals for non-qualified expenses before age 65 may be subject to a 20% penalty in addition to regular income tax.

Speak to your employer about Forma

If you want convenient access to FSAs and HSAs as an employee, you should encourage your employer to include pre-tax account options as a part of your compensation package. If you feel you don’t have enough leverage to influence their decision, talk to other employees and start an initiative to expand your benefits options with FSAs and HSAs.

Forma makes it easy to offer custom pre-tax accounts at scale, making it easier for employees to pick and choose the benefits they want. 

Learn more on the Forma pre-tax accounts page.

Alternatively, if you’re an employer looking to revamp your employee benefits offering, <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a consultation</span> with one of our experts today.

This document is for informational purposes. Forma is not engaged in the practice of law. Nothing contained herein is intended as tax or legal advice nor is it intended to replace tax or legal advice from counsel. If you need tax or legal advice, please consult with counsel or a certified tax professional.