FSA and HSA: What’s the Difference?
Did you know that as a federal employee, you have access to two tax-advantaged accounts to help cover the costs of your medical care?
It’s true! Federal employees can choose to open a Flexible Spending Account (FSA) and/or a Health Savings Account (HSA). These two accounts are often confused, but it’s important to understand the differences to make the most of your benefit—and not accidentally lose any of your hard-earned money. Here’s what you need to know.
What Is an FSA?
An FSA is an employer-sponsored account that lets you set aside pre-tax money to pay for qualified medical expenses such as copays, prescriptions, over-the-counter medications, and certain medical supplies. Because contributions reduce your taxable income, FSAs offer immediate tax savings. However, FSAs follow a “use-it-or-lose-it” rule. For the 2025 plan year, you can carry over up to $660 into 2026, but anything above that is forfeited if not spent. FSAs do not offer investment options and cannot be kept into retirement.
The big benefit? Your contributions are taken pre-tax, so you lower your total taxable income for the year.
Pros: Tax-free contributions lower your tax bill; widely usable for everyday medical expenses.
Cons: You may forfeit unused amounts over $660; FSAs do not provide a debit card for federal employees; funds cannot be used in retirement.
What Is an HSA?
An HSA, while similar in purpose, offers far more long-term flexibility. You can open an HSA only if you are enrolled in a High Deductible Health Plan (HDHP) that meets IRS requirements. For 2025, contribution limits increase to $4,300 for individual coverage and $8,550 for family coverage, plus an additional $1,000 catch-up contribution if you’re 55 or older. Unlike an FSA, an HSA belongs entirely to you — it stays with you even if you change jobs or insurance plans. You can contribute through payroll or directly, and funds can be invested for tax-free growth. There is no expiration date on HSA funds, allowing you to save for future medical costs well into retirement
Pros: Triple tax advantage (tax-free contributions, tax-free growth, tax-free withdrawals for qualified expenses); funds roll over indefinitely; portable and investable.
Cons: Requires enrollment in an HDHP; may include account or investment fees; must be used for qualified medical expenses to avoid taxes and penalties.
How to Choose Between an HSA and an FSA
In general, an HSA offers more flexibility and the opportunity for greater savings and tax benefits over time. Because you can keep your money growing tax-free for as long as you like, it’s potentially a great investment vehicle, especially if you’ve already maxed out your TSP contributions. The only drawback is that you must spend the money on healthcare expenses to avoid taxes and penalties. Still, the odds of you having those expenses as you age are very strong, making the HSA a great addition to your full financial plan.
To make your choice between an HSA and FSA, you’ll first have to check your eligibility. Do you have a high-deductible health plan?
More importantly, do you want one?
If you are generally healthy and aren’t in danger of meeting that high deductible, then an HDHP and HSA probably make sense for you. You might also feel comfortable with the high deductible if you have a solid emergency fund or robust savings account that you can tap into if you need to (and remember, you can use your HSA funds to cover the deductible as well).
On the other hand, if you need to access healthcare regularly and don’t have a plan to cover that high deductible, an FSA might be better for you. You can pair this benefit with an insurance plan with a lower deductible to get the great tax benefit without worrying about stretching yourself too thin if you get sick.
The Bottom Line
Both the FSA and HSA are great benefits, but you should consider your full financial picture to make the best decision. We get it—sorting through your benefits can be tricky. Sometimes you need help putting together all the pieces of the benefits puzzle. If that’s true for you, contact us! We’re professionals in federal retirement and benefits, and we’re here to help you develop a solid financial plan that makes the most of everything you’ve earned.