There are two choices in front of you: on one side, a benefits package that covers every need you know you and your employees have, as well as needs you didn’t know you had. On the other side, a benefits package so affordable it might as well be free. You stand there, weighing the options, thinking to yourself, “Why isn’t there a third option that combines the best of both of these choices?” This is often the problem businesses find themselves in when it comes to creating an employee benefits package. Sure, you can find a broker or agency that will put together a totally comprehensive offering or a completely affordable package, but is it possible to marry affordability and completeness? Maybe, but even if it is, it’s certainly not an easy task.
At Payday HCM, we’re very familiar with the problem of finding that perfect benefits package that balances cost and comprehensiveness. We have plenty of clients ask us for tips or guidance on what kinds of solutions contain the best of both worlds and how they can go about offering those solutions to their employees. Compounding this problem is the lack of information available: traditional benefits agencies and brokers benefit from things being confusing, something that, regardless of whether you are our client or not, we frankly can’t stand. This air of confusion often lingers around the areas of HSAs and FSAs.
That’s why, in this article, we’ll be going over the pros and cons of health savings accounts (HSAs) and flexible spending accounts (FSAs), two options for employers to consider when creating a benefits package that can help bridge the gap between cost and coverage. We’ll start with a brief overview of what both of these types of accounts are before diving into the details on the benefits and drawbacks of each. By the end of this article, you’ll have the information you need to decide whether an FSA or HSA (or neither) is right for your employees.
In this article, you will learn:
- What’s the Difference Between an HSA and an FSA?
- Pros and Cons of a Health Savings Account (HSA)
- The Pros and Cons of a Flexible Spending Account (FSA)
What’s the Difference Between an HSA and an FSA?
Firstly, before we get into the specifics on the pros and cons of HSAs and FSAs, we’ll first go over the differences between the two.
What is a Health Savings Account (HSA)?
While HSAs and FSAs have similar acronyms, the two are quite distinct from one another. For starters, a health savings account is a type of savings account that allows individuals to set aside pre-tax dollars for use on qualifying medical expenses. Those with high deductible health plans are able to contribute to an HSA.
The qualifying medical expenses that are eligible to be covered using HSA dollars include a wide variety of medical services, including regular doctor visits, prescriptions, x-rays, eye exams, and more. Employers are also able to make contributions to an HSA on an employee’s behalf.
What is a Flexible Spending Account (FSA)?
On the flip side, a flexible spending account is a tax-advantaged account that allows you to set aside pre-tax dollars to use on qualifying medical expenses. Like an HSA, an employee makes pre-tax contributions to an FSA, and the employer may also make contributions. An FSA is similarly tax-advantaged.
Unlike an HSA, however, an FSA is tied to your employer. This means that, if you leave an employer for one reason or another, you will also lose your FSA (HSAs, though, are portable and are not tied to your employer). FSA funds are also unable to be invested or accrue interest and typically must be used within a given time frame.
Pros and Cons of a Health Savings Account (HSA)
Now that we understand what HSAs and FSAs are, we can dive into the pros and cons of each—first up is HSAs.
The Pros of Health Savings Accounts (HSAs)
HSAs can have many pros. Firstly, a health savings account is tax-advantaged, meaning contributions can be made either pre-tax or are tax-deductible, any withdrawals are tax-free, and any interest accrued by investing HSA funds is also tax-free. This means an HSA can feel a lot closer to a regular savings account rather than one simply dedicated to medical expenses (although that is how it will be spent).
Also, HSAs are portable, meaning they are not tied to any specific employer. Employees with an HSA will be able to take it with them between employers so long as they are still enrolled in a qualifying plan. There is also no timeline when it comes to using HSA funds—contributions continue to be made and are spent at the employee’s discretion.
The Cons of Health Savings Accounts (HSAs)
Much like everything else, HSAs are not without their downsides. The first downside (not so much a downside as much as a catch) is that you must be enrolled in a qualifying high-deductible health plan. These plans offer individuals lower premiums but with the trade-off of higher out-of-pocket costs (something the HSA is supposed to offset).
An HSA also comes with contribution limits: for 2026, the contribution limits for an HSA are set at $4,400 for self-only coverage and $8,750 for family coverage, with those 55 or older and not on a Medicare plan being eligible to contribute an additional catch-up of $1,000. This contribution limit is the same, regardless of whether your employer contributes to your HSA or not.
The Pros and Cons of a Flexible Spending Account (FSA)
Now that we’ve gone over the pros and cons of an HSA, we can take a closer look at the pros and cons of an FSA.
The Pros of a Flexible Spending Account (FSA)
A flexible spending account—sometimes referred to as a flexible spending arrangement—shares many of the same benefits as an HSA: they’re both tax-advantaged, meaning your contributions can be made pre-tax, employers can make contributions, and they can be spent on similar qualifying expenses.
Depending on the structure of your FSA, these funds may be more readily available for use compared to an HSA. Accessing FSA funds is also typically easy, as FSAs can be spent using a dedicated debit card or through an online portal. FSAs are also not tied to any particular plan type, unlike an HSA, which requires you to be enrolled in an HDHP.
The Cons of a Flexible Spending Account (FSA)
An FSA does have its trade-offs, though. One of the biggest potential downsides of an FSA is that it is tied to an employer, meaning you’ll lose access to your FSA if you leave your employer where you have an FSA. This also means you can only open an FSA if it’s offered by your employer, meaning those who are self-employed are ineligible for an FSA.
Secondly, an FSA operates on a use-it-or-lose-it model, meaning you must use all your FSA funds by the end of the year or else the remaining funds will be forfeited. In some cases, an FSA may permit you to rollover funds, but this amount is limited to $660 for 2025 as set by the IRS. Your employer would need to allow you to rollover funds, however.
Save Money With Flexible Health Spending Options
Creating a benefits package for your organization is all about the balance between comprehensiveness and cost—you want to offer your employees a diverse array of benefits that can help cover all of their needs while simultaneously keeping costs low enough for both you and your employees so that the cost doesn’t outweigh the benefits. Of course, this is easier said than done. Putting together the right combination of benefits that comes out to an affordable cost isn’t easy and can require a lengthy research process. Fully understanding all of the options available to you can quickly become overwhelming. Luckily, with the information provided here in this article, you’ll be able to understand the choices available to you and how they’ll potentially benefit your employees.
Offering your employees a comprehensive benefits package is important not only to ensure you’re meeting all of your employees’ needs, but also so you can recruit new top talent to your organization. Even still, a great benefits package can be costly for businesses. When it comes to health insurance plans, businesses have a number of different options available that can help keep costs low and enrollment levels high—this includes level-funded plans. Learn more about the pros and cons of level-funded plans and find the right fit for your business.
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