HSA vs. FSA: Which Tax-Advantaged Account Is Right for Your Employees (and Your Business)?

Dec 26

As a small business owner, you want to offer benefits that matter— ones that help your team save money, reduce taxes, and feel valued. But when it comes to health savings accounts (HSAs) and flexible spending accounts (FSAs), the alphabet soup can get confusing fast.

Both HSA and FSA accounts let employees set aside pre-tax dollars for medical expenses. Both save money. But they work very differently—and choosing the wrong one (or not offering either) could mean leaving thousands of dollars on the table for your team and your business.

Let's break down what you need to know to make the right call.

What's the Difference Between an HSA and an FSA?

Health Savings Account (HSA)

An HSA is a tax-advantaged savings account that employees can use to pay for qualified medical expenses. Here's what makes it unique:

The employee owns it. Even if they leave your company, the account and the money in it go with them. It's theirs forever.

The money rolls over. Unused funds don't disappear at the end of the year—they keep growing, year after year. Many people use HSAs as a long-term savings vehicle, even into retirement.

Triple tax advantage. Contributions are pre-tax, the money grows tax-free, and withdrawals for medical expenses are tax-free. It's one of the best tax shelters available.

But there's a catch. HSAs are only available if your health plan is a high-deductible health plan (HDHP). For 2026, that means a deductible of at least $1,650 for individuals or $3,300 for families.

2026 Contribution Limits:

Individual: $4,300
Family: $8,550
Age 55+ catch-up: Additional $1,000

Flexible Spending Account (FSA)

An FSA is also a pre-tax account for medical expenses, but it works quite differently:

The employer owns it. Technically, FSAs are employer-established benefit plans. If an employee leaves, they typically lose access to any remaining funds.

Use it or lose it. Most FSAs require employees to use their contributions by the end of the plan year, or they forfeit the money. Some plans offer a grace period (up to 2.5 extra months) or allow a small carryover (up to $640 in 2026), but the core rule remains: spend it or lose it.

Works with any health plan. Employees don't need an HDHP to contribute to an FSA. If you offer a traditional PPO or HMO, FSAs are usually the only pre-tax option for medical expenses.

Lower contribution limit. For 2026, employees can contribute up to $3,300 to a healthcare FSA.

The Tax Benefits: Why This Matters to Your Bottom Line

Here's something many small business owners don't realize: when your employees contribute to an HSA or FSA, you save money too.

Employee contributions to both accounts are made pre-tax through payroll deductions, which means:

You don't pay employer payroll taxes (Social Security and Medicare) on those contributions
Employees don't pay income tax or payroll taxes on that money
Everyone wins

Quick example: If an employee contributes $3,000 to an HSA, you save approximately $230 in payroll taxes (7.65% employer share). Across a team of 10 employees, that's over $2,000 back in your pocket—just for offering a benefit your team wants anyway.

And if you choose to contribute to your employees' HSAs as an added perk? Those contributions are tax-deductible for your business.

HSA vs. FSA: What Is Right For Your Small Business?

The right choice depends on your health plan and your team's needs.

Choose an HSA if:

You offer (or are considering) a high-deductible health plan
Your employees want flexibility and long-term savings potential
Your team includes people who are relatively healthy and want to save for future medical expenses
You want to offer an employer contribution as a standout benefit

Choose an FSA if:

You offer a traditional health plan (PPO, HMO, etc.) that isn't HSA-eligible
Your employees have predictable medical expenses each year
Your team prefers to use the money within the year rather than save long-term
You want a simple, straightforward option that works for everyone

Can you offer both?

Not to the same employee for the same year, at least not in the traditional sense. Employees enrolled in an HSA-eligible plan generally cannot also contribute to a general healthcare FSA, as it would disqualify them from the HSA.

However, you can offer a limited-purpose FSA alongside an HSA. This type of FSA only covers dental and vision expenses, allowing employees to maximize their tax savings while keeping their HSA eligibility intact.

What Expenses Qualify?

Both HSAs and FSAs cover a wide range of qualified medical expenses, including:

Doctor visits and copays
Prescription medications
Dental and vision care
Mental health services
Medical equipment and supplies
Over-the-counter medications (with some restrictions)

The IRS publishes a full list of qualified expenses, but the general rule is: if it's for medical care and not cosmetic, it probably qualifies.

The Bottom Line: Don't Leave Money on the Table

Offering an HSA or FSA isn't just a nice perk, it's a smart financial move for your employees and your business. It shows your team you care about their financial wellness, it saves everyone money on taxes, and it's one more reason top talent will choose to work with you.

At Shipley Benefits, we help small businesses design benefits packages that work— not just on paper, but in real life. Whether you're considering an HDHP with an HSA, sticking with a traditional plan and adding an FSA, or trying to figure out what's even possible with your budget, we're here to guide you through it.

Ready to explore your options? Schedule a free 30-minute consultation and let's find the right fit for your team.

Shipley Benefits & Insurance specializes in employee benefits and insurance solutions for small businesses and individuals. With over 20 years of experience, we make benefits simple, strategic, and stress-free.

Kate Baum