Organizational Wellness

HSA vs FSA: Which is Better to Have in an Employee Benefits Package?

Last Updated Dec 9, 2024

Time to read: 8 minutes

Deciding between an HSA (Health Savings Account) and an FSA (Flexible Spending Account) for your benefits package can feel overwhelming. Both offer tax advantages and help employees cover medical costs, but which one is truly the best fit for your team? Without a clear understanding of how each option works, you risk offering a plan that doesn’t fully meet your employees' needs — or worse, leaves them with unused funds or missed savings opportunities.

Choosing the wrong plan can lead to employee frustration, unnecessary tax burdens, and missed chances for long-term financial growth. And with rising healthcare costs, making the right choice is more critical than ever.

Ready to clear up the confusion? Let's discuss learn the key differences between HSAs and FSAs, and how to pick the option that maximizes savings, meets your team’s healthcare needs, and adds real value to your benefits package.

Ultimate Guide to Reducing Employee Healthcare Costs

What Is an HSA?

A health savings account is a type of tax-advantaged savings plan designed exclusively for medical costs. It allows you to set aside a pretax percentage or dollar amount of your compensation into a special bank account, which you can use to pay for medical expenses at any time. The 2024 HSA annual contribution limits for individuals are $4,150 and $8,300 for families.

If you're considering adding an HSA to your employee benefits package, understand that not everyone will qualify for the account. To be eligible, an employee must enroll in a government-approved high-deductible health insurance plan (HDHP). If you're unsure whether your company's medical plans fall into the HDHP category, check the plan documents or ask the insurance company.

Companies that offer an HDHP can add on HSAs, which employees can sign up for if they wish. Every paycheck, you direct a specific amount into the employee's HSA account, which they can access via a debit card or checkbook. The employee decides how much of their earnings they want to contribute, and employers can tack on an additional amount, similar to how a 401(k) arrangement works.

Once the money goes into the HSA, it sits there until the employee spends it on qualifying medical expenses or withdraws the balance. Employees may use their HSA money to invest in mutual funds or stocks, which may help to grow their balance. Any account growth is tax free, and as long as employees use the money for qualifying medical expenses, there is no tax on withdrawals, either.

What Is an FSA?

A flexible spending account — sometimes called a flexible spending arrangement — is another type of tax-advantaged savings plan you can use to pay for out-of-pocket medical expenses, including copays, deductibles, prescription medications, and medical equipment.

The maximum contribution for FSAs is $3,200 annually per employee, but employees don't have to contribute that much if they don't think they'll use all of the funds. Both employers and employees can contribute to an FSA. However, employees must use all available FSA funds by year end. If they don't, they may lose the money unless your organization offers a grace period or rollover option.

The maximum grace period for unused FSA funds is two and a half months. If an employer decides to allow rollovers, employees can keep up to $640 per year for future medical expenses.

Unlike HSAs, you can't invest your FSA money in mutual funds or stocks to grow your balance. However, there are also no requirements to enroll in an HDHP insurance plan.

Some employers offer FSA plans for other expenses besides health care, such as dependent care. A dependent care FSA can help pay for daycare or senior daycare on a tax-advantaged basis.

HSA vs. FSA: Key Differences You Should Know

HSAs and FSAs share some similarities, so it's easy to confuse them. However, there are differences to be aware of, especially when deciding which option is best for your workplace.

HSAs Are Only Available With HDHP Plans: An HSA is only an option with qualifying HDHP insurance plans. However, employers can offer FSAs with any health insurance plan, regardless of whether it's high deductible.
No Investment Options With FSAs: Employees enrolled in FSAs can't increase their balance through investments. It's strictly a cash-only plan.
Use It or Lose It With FSAs: If an employee doesn't use their available funds by year end and your organization doesn't offer a grace period or rollover, they'll lose the money. They can't save it for long-term medical expenses like they might with an HSA.
HSAs Have Higher Contribution Limits: Under an HSA, you can set aside more money for medical expenses than with an FSA.

Pros and Cons of HSAs

What are the benefits and drawbacks of an HSA? There are a few.

One advantage of the HSA plan is potential growth. If you invest a portion of your HSA funds into mutual funds, stocks, or other investment options, the balance may grow over time. You could theoretically let the funds accumulate until you withdraw them in retirement. That's a significant advantage, especially for people who may need long-term care or have a medical condition.

Another benefit of HSAs is their higher contribution amounts. You can sock away more money into HSA plans than you can under an FSA, all of which is tax free. Employees who want to maximize their contributions may also reduce their income tax liability. And — bonus — employers can also contribute to their workers' HSA, which is attractive to employees.

Unlike FSAs, an employee's HSA is transferable. If they decide to change companies or retire, an employee takes their HSA with them, just like they would a 401(k). At age 65, workers can begin withdrawing funds from an HSA for non-medical expenses without incurring a penalty.

However, HSAs aren't always a perfect solution. If your company doesn't offer a qualifying HDHP plan, you can't provide your employees with an HSA. If you do have a qualifying HDHP plan, only employees who sign up for it can enroll in an HSA.

Keep in mind that HDHP plans are true to their name: They have high deductibles. That means that employees are on the hook for most medical expenses until they reach the plan's deductible, which may be $1,600 or more for individuals and $3,200 for families. Some employees may prefer more traditional plans that offer more coverage with smaller deductibles.

Pros and Cons of FSAs

Like HSAs, FSAs have some advantages and disadvantages.

Under an FSA, employees can put aside money for medical expenses tax free. It's a great tool to mitigate out-of-pocket medical expenses while also potentially lowering your annual income tax liability. Employers have the option to contribute to a worker's FSA, which is an attractive perk that may encourage more workers to sign up for an account.

Employees don't need to sign up for an HDHP to participate in an FSA plan. All medical insurance plans are eligible for FSAs. So, regardless of what type of medical coverage your company offers, you should be able to add on FSA options, too.

The main drawbacks of FSAs are the requirements to use contributions during the plan year and the lack of opportunity to invest contributions for growth. If employees don't use their FSA money, it's lost. They can't save it for long-term future medical expenses, and they can't try to grow their balance through investments.

FSAs are non-transferrable, so an employee who leaves the company before using all of their FSA funds can't move the money to another employer's FSA plan. Contribution limits are also lower for FSAs, which is disadvantageous for people with significant medical costs during the year.

Which Is Better for Your Employees — An HSA or an FSA?

Neither an HSA (Health Savings Account) nor an FSA (Flexible Spending Account) isn’t one-size-fits-all. Each option comes with its own set of advantages, so the best choice really depends on your employees' unique needs and financial circumstances.

Th primary consideration is whether your organization offers a High-Deductible Health Plan (HDHP). If not, an HSA isn't on thee table as it won't be available to your employees since an HDHP is a prerequisite for an HSA. WIthout that, an FSA is your only option.

If your company does have an HDHP and can provide employees with both options, help your employees by breaking down how each one works, highlighting the key differences and benefits. By providing them with clear information, they’ll be better equipped to make a choice that suits their personal financial goals and healthcare needs. Your support can empower them to make the most of their benefits.

Customize Health and Wellness for Your Team’s Unique Needs

Offering both HSAs and FSAs gives your employees the flexibility to choose the plan that fits their medical and lifestyle needs. However, their wellbeing extends beyond just saving on healthcare costs. Employees also need access to resources that help them stay active, reduce stress, and maintain a balanced life.

A comprehensive wellbeing program empowers employees to prioritize their health. Offering customizable options like gym memberships, mindfulness apps, and nutrition counseling helps them thrive — 99% of HR leaders say wellbeing programs are important for employee satisfaction.

Speak with a Wellhub Wellbeing Specialist to explore customizable health and wellness support for your team!

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[*] Based on proprietary research comparing healthcare costs of active Wellhub users to non-users.