FSA and HSA are separate accounts that let you set aside pre-tax money for medical costs

An FSA (Flexible Spending Account) and an HSA (Health Savings Account) are both tax-advantaged accounts — meaning the money you put in reduces your taxable income. You contribute money before taxes are taken out of your paycheck, spend it on may have access to medical expenses, and pay no federal income tax on those funds. They are not the same account, and the rules about who can have one, how much you can contribute, and what happens to unused money are different.

The key difference: an HSA is a savings account you own and keep forever, even if you change jobs or retire. An FSA is tied to your employer and resets or ends when you leave the job. An HSA requires you to be enrolled in a high-deductible health plan; an FSA does not. Understanding which one you have access to, and how each one works, affects how much you should contribute and what you can do with the money.

Key Takeaways

  • FSA money is "use it or lose it" — most unspent funds at the end of the year are forfeited, though some employers allow a small carryover or grace period.
  • HSA money rolls over year to year and belongs to you permanently, so you can let it grow and use it decades later.
  • You can only open an HSA if your health insurance is a high-deductible plan; FSA has no insurance requirement.
  • Both accounts cover the same types of medical expenses: copays, deductibles, prescriptions, dental, vision, and many other out-of-pocket costs.
  • Contribution limits are set by the IRS each year and differ between FSA and HSA.

How FSA works and when money expires

An FSA is offered by your employer as part of your benefits package. You decide how much to contribute each year during open enrollment, and that money is deducted from your paycheck before taxes. You then use a debit card or submit receipts to withdraw money for may have access to medical expenses throughout the year.

The critical rule: money left unspent at the end of the calendar year is forfeited. You lose it. This is called the "use it or lose it" rule. However, many employers now offer one of two options to soften this: a carryover of up to $640 (the amount changes yearly) into the next year, or a grace period of up to 2.5 months into the following year to spend down your balance. Not all employers offer either option, so check your plan documents to see what applies to you.

If you leave your job, your FSA ends. You have a limited window (usually 60 to 90 days, depending on your plan) to submit claims for expenses you incurred while employed. Any unspent balance is gone.

How HSA works and how money accumulates

An HSA is a personal savings account that you own. You can open one only if your health insurance is a high-deductible health plan (HDHP) — a plan with a higher deductible and lower premiums than standard plans. Your employer may contribute to it, you may contribute to it, or both. Unlike an FSA, you are not required to spend the money each year.

Money in an HSA rolls over indefinitely. If you do not spend $500 this year, that $500 stays in your account next year, and the year after that. You can let it grow and use it for medical expenses at any point in your life — even in retirement. The account is yours to keep even if you change jobs, retire, or switch to a different health plan (though you can only contribute while you are enrolled in an HDHP).

Some HSAs are invested like brokerage accounts, meaning your balance can grow through investment returns. Others are held as cash. The investment options depend on which bank or provider manages your HSA.

Contribution limits and how much you can set aside

The IRS sets maximum contribution limits each year, and they differ between FSA and HSA. For 2024, the FSA limit is $3,200 for individual coverage. For HSA, the limit is $4,150 for individual coverage or $8,300 for family coverage. These amounts change annually, so check the current year's limits before you enroll.

With an FSA, you choose your contribution amount during open enrollment, and it is locked in for the year. You cannot change it unless you have a may have access to life event (marriage, birth of a child, loss of coverage, significant change in expenses). With an HSA, you can usually adjust your contribution at any time, and if your employer contributes, that counts toward your limit.

The strategy differs: with an FSA, you want to contribute only what you are confident you will spend, because leftover money is lost. With an HSA, you can contribute the maximum if you can afford it, because the money is yours to keep and use later.

What medical expenses both accounts cover

Both FSA and HSA cover a broad range of out-of-pocket medical costs. Copays, coinsurance, deductibles, and prescription medications are covered. Dental work (cleanings, fillings, root canals, orthodontics), vision care (eye exams, glasses, contacts, LASIK), and hearing aids are covered. Over-the-counter medications like pain relievers and allergy medicine are covered if you have a prescription from a doctor.

Mental health services, physical therapy, chiropractic care, and many other treatments are also covered. The IRS maintains a detailed list of may have access to expenses, and both accounts follow the same rules. However, health insurance premiums, cosmetic procedures, and gym memberships are not covered. If you are unsure whether a specific expense qualifies, ask your account administrator or check the IRS Publication 502.

Why you might choose one account over the other

If your employer offers both an FSA and an HSA (which happens when the FSA is for non-medical expenses like dependent care, or when you have a choice of health plans), the decision depends on your situation. Choose an FSA if you have predictable medical expenses each year and want to reduce your taxable income now. Choose an HSA if you want to build long-term savings for future medical costs, or if you are healthy and do not expect large expenses this year.

If you can only access one, the choice is made for you. You can have an FSA without an HSA, but you cannot have an HSA unless you are enrolled in a high-deductible health plan. Some people enroll in an HDHP specifically to access the HSA, because the tax savings and long-term growth potential outweigh the higher deductible.

What happens to your account when you change jobs or retire

If you leave your job, your FSA ends. You have a short window to submit final claims, and any remaining balance is forfeited. Your HSA, by contrast, stays with you. You own it outright, and the money remains available for medical expenses for the rest of your life. You can even use HSA funds for non-medical expenses in retirement without penalty (though you will owe income tax on those withdrawals).

This is one of the largest practical differences between the two accounts. An HSA functions as a retirement savings vehicle in a way an FSA cannot. If you are in a position to contribute to an HSA and do not expect to need the money immediately, the long-term benefit is substantial.

Frequently Asked Questions

Can I have both an FSA and an HSA at the same time?

Not usually. If you have an FSA for medical expenses, you cannot have an HSA. However, some employers offer an FSA for dependent care (childcare or elder care) alongside an HSA for medical expenses — those two can coexist. Check your employer's plan to see what is available.

What happens if I do not spend all my FSA money by the end of the year?

It depends on your employer's plan. Most plans follow the "use it or lose it" rule and you forfeit the balance. Some employers offer a carryover (up to $640 in 2024) or a grace period (up to 2.5 months into the next year) to spend it down. Review your plan documents or ask your benefits administrator which option applies to you.

Can I use HSA money for expenses that are not medical?

Not without a penalty. If you withdraw HSA funds for non-medical expenses before age 65, you owe income tax plus a 20 percent penalty on the amount withdrawn. After age 65, you can withdraw for any reason, but non-medical withdrawals are taxed as income (no penalty). Medical expenses remain tax-free at any age.

Do I need to submit receipts to use FSA or HSA money?

Most FSA and HSA debit cards work without requiring a receipt at the point of sale, but your account administrator may ask you to provide documentation later to verify the expense was may have access to. Keep receipts for at least three to five years in case of an audit. Some providers require receipts upfront before they will reimburse you.

What if my employer contributes to my HSA — does that count toward the annual limit?

Yes. The IRS limit is the total of all contributions — yours plus your employer's. If your employer contributes $1,000 and you contribute $2,000, your total is $3,000, which counts against the annual limit. You cannot exceed the limit even if both you and your employer are contributing.