Small Business

HSA vs FSA: Which is Best For Your Employees? 

Updated on January 07, 2020


Updated January 7, 2020

As a small business owner, offering your employees a comprehensive benefits plan can help you attract top talent and reduce turnover. Not all small business owners understand the distinctions between different kinds of medical savings accounts, however – for example, what’s the difference between a Health Savings Account (HSA) and a Flexible Spending Account (FSA)?

What is an HSA?

A Health Savings Account (HSA) is designed to work in conjunction with qualifying high deductible health insurance plans (HDHPs). When small business owners offer employees an HDHP, you may be offering them a accompanying health insurance plan with lower monthly premiums but a higher annual deductible than other possible plans. A Health Savings Account is a tax-advantaged savings account that can offset the higher annual deductible costs of HDHPs by paying for designated health care expenses.

What is an FSA?

As the name suggests, a Flexible Spending Account offers small business owners and employees more leeway when it comes to choosing an insurance plan. The FSA is still a tax-advantaged account designed to cover health care costs but it works with any type of health insurance plan – not just qualified high-deductible plans.


There are some major differences between these two types of accounts. For example, as the employer, you own the FSA and that account is connected to the job. On the other hand, an HSA account is linked specifically to the person, not the job.  So employees maintain ownership of their HSA account and can also transfer their funds if they change jobs.

Another major consideration for small businesses deciding between the HSA vs FSA model is rollover rules. Employees can rollover HSA funds from one year to the next, meaning that the HSA can grow from year to year, but they must use all their FSA monies by the end of the year or lose them in most cases. The leftover funds in an FSA generally revert to the employer.

An HSA vs FSA Side-by-side comparison

Flexible Spending AccountHealth Savings Account
Available to:Available to:
May be made available to employees by employers regardless of what kind of health insurance plan they are enrolled inOnly available to employees enrolled in a qualifying HSA-eligible high-deductible health plan (HDHP)
Annual Contribution Limit (2020)Annual Contribution Limit (2020)
Contribution limit is $2,750Contribution limit is $3,550 for individuals or $7,100 for families
Carryover RuleCarryover Rule
Carryover option up to $500, if set up by employerAll funds carry over automatically
Account owner: EmployerAccount owner: Employee
No interest accrualMay accrue interest
Withdrawal RulesWithdrawal Rules
Withdrawal only for eligible healthcare expensesWithdrawals for qualified medical expenses are not taxed and no penalty applies. Non-qualified withdrawals are taxed as income and a 20% penalty may apply for persons under age 65.

With a Flexible Spending Account, small business owners set up a pretax payroll deduction for each employee to use throughout the year and that cannot be changed unless the employee has a qualifying life event such as a marriage. With HSA accounts, the employee can usually change his or her distribution rate with each check. As an employer, you can opt to contribute to either plan as part of your employee’s benefits package.

If you still are unsure which savings plan best suits your small business, contact your licensed insurance broker for advice.

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