Over the last few years, healthcare costs for Americans have been a hot topic—but FSAs and HSAs are often overlooked. Still, they’re quite common: 72% of private industry employees and 89% of governmental employees are offered some form of medical care benefits in the workplace, and many of those employers offer FSAs (Flexible Savings Accounts) or HSAs (Health Savings Accounts) as well.

In fact, these accounts are so ingrained in the fabric of America’s healthcare saving system that nearly $116B sits in HSAs alone, and forfeited FSA funds amount to around $3B each year.

Given the magnitude of these accounts, it’s important we understand their unique features—and many American savers don’t. FSAs and HSAs are like fraternal twins who have distinctive characteristics and tendencies despite their (assumed) similarities.

Below, we will demystify the differences between the two, allowing you to strengthen your foundational knowledge—and hopefully your savvy use—of these powerful savings accounts.

Eligibility Differences

FSAs adopt a “one account fits all employees” methodology: If your employer offers an FSA, there are few requirements to become eligible. There are two main types—Dependent Care FSAs (DCSFAs) and Health Care FSAs (HCFSAs or just FSAs). The (minimal) eligibility rules remain the same for both.

With HSAs, on the other hand, you must be enrolled in a qualified High Deductible Health Plan (HDHP) to be eligible. For a healthcare plan to meet HDHP requirements, it must have a minimum deductible of $1,650 for individual coverage and $3,300 for family coverage, and a maximum out-of-pocket limit of $8,300 for individuals and $16,600 for families in 2025.

It is also important to note that FSAs are not a package deal with your health insurance like HSAs can be. With an HSA, once you enroll in the HDHP, the HSA is usually automatically offered in tandem. But since an FSA doesn’t require any specific kind of health insurance, it’s generally viewed as a supplement to the employees’ existing healthcare. So while the HSA is a requisite of HDHPs, employers voluntarily offer the FSA to help mitigate annual, short-term healthcare costs.

Ownership: FSA vs HSA

Another fundamental difference between FSAs and HSAs is how they are held. An FSA is owned by your employer, who typically holds the funds with an FSA provider (like HealthEquity or Optum). HSAs, in contrast, are owned individually by the employee.

That means FSAs are both less risky and less of a commitment for employees: Since these plans don’t require any specific healthcare coverage, you can enroll without having to switch plans or assume a higher deductible. Meanwhile, the employer assumes most of the responsibility since they must cover overhead costs and comply with the rules of regulatory bodies like the IRS, and the Employee Retirement Income Security Act (ERISA) for a plan they were not mandated to offer in the first place.

With HSAs, the risk and responsibility shifts to employees. Not only are they required to take on a higher deductible to access these accounts, but they’re also usually required to manage the account themselves without any employer involvement or guarantee.

There is, however, one important caveat. As you may have guessed, since the employee doesn’t own the FSA, they don’t own the contributed funds, either. FSA contributions are use-it-or-lose-it: Whatever balance remains in an FSA by December 31st will be forfeited back to the employer.

Funds are also forfeited if your employment is terminated. Some employers may allow a grace period for you to use your health account balance or even allow you to carry over funds, but not both. The grace period lasts 2.5 months or until March 15th of the following year, and the carryover is $640 for 2025.

With HSAs, the funds remain yours as long as the account remains open—even if you change or lose your job.

Use of Account Funds

FSAs and HSAs share both common ground and stark differences as to what their funds can be used for. For instance, both FSA and HSA funds can be used for medical copays and coinsurance, deductibles, dental and vision expenses, prescription medication, over-the-counter medications, preventive care, physical therapy, and even mental health support, to name a few.

But HSAs tend to have an edge in this regard since their funds can also be used for insurance premiums. That rule includes premiums for long-term care, COBRA, Medicare Parts B and D, and marketplace healthcare if you’re unemployed. Long-term care coverage is often seen as one of the largest and most dire retirement expenses, so having a safety net to hedge against these costs can be a huge benefit.

Not to be left out, however, FSAs also offer benefits most HSAs don’t—namely, dependent care expenses (if you have a DCFSA).

Taxability, Investment, and Use of Funds

For starters, both FSAs and HSAs are subject to annual contribution limits—though these limits differ. The maximum FSA contributions are $3,300 and $5,000 for HCFSAs and DCFSAs, respectively, in 2025. For HSA contributions, the maximum contribution is $4,300 for individuals and $8,300 for families.

Regarding taxability, investment options, and fund usage in retirement, FSAs and HSAs could not be more different. Whereas HSAs offer the highly sought-after triple tax advantage of tax-free contributions, tax-free growth, and tax-free withdrawals (for qualified medical expenses), FSAs only offer reduced taxable income if the contribution is made through an employee salary deferral. HSA contributions are deductible whether they’re made via salary deferral or an adjustment on your tax return.

Furthermore, unlike HSAs, FSAs do not act as an investment vehicle and do not accumulate funds for growth. As you’ll recall, FSAs are employer-owned and the employee’s balance “resets” each year. That’s basically the opposite of year-over-year accumulation.

With an HSA, however, account holders keep and control their money. They can choose from pre-set baskets of investment options (like mutual funds and ETFs) or DIY their allocation among stocks and other assets. Because of their high investment earning potential, HSAs are unmatched when it comes to healthcare savings growth.

Lastly, once the HSA account holder turns 65, there is no 20% penalty for using the account funds on ineligible expenses. After 65, the HSA distributions are only taxed at the account holder’s ordinary tax rate. So, in essence, an HSA can act as an alternative retirement savings vehicle, like an IRA or 401(k).

Working with a financial planner to help you optimize your healthcare savings strategy can make a difference in both your working and glory years. Here at Felton & Peel, we help add clarity to the complexity, providing you with peace of mind throughout your financial journey. We’re here to help—and your first consultation is free.