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

An HSA (Health Savings Account) and an FSA (Flexible Spending Account) are both tax-advantaged accounts that hold money you contribute before taxes are taken out. You use that money to pay for medical, dental, and vision costs. The main difference is who can open one, how much you can contribute each year, and what happens to unused money.

Both accounts reduce your taxable income for the year. If you put $2,000 into an FSA, you do not pay income tax on that $2,000. The same applies to an HSA. This makes them more valuable than simply paying medical bills out of your regular paycheck, where taxes come out first.

You do not have to submit receipts to your employer or the account provider to prove you spent the money on medical care. You can usually pay with a debit card linked to the account, or you can pay out of pocket and request reimbursement later.

Key Takeaways

  • HSAs are only available if you have a high-deductible health insurance plan, but FSAs work with any health plan your employer offers.
  • FSA money that you do not spend by the end of the plan year is forfeited, while HSA money rolls over and grows year to year.
  • You can contribute up to $4,150 per year to an FSA (for 2024), while HSA limits are higher and depend on whether your coverage is individual or family.
  • Both accounts cover the same types of expenses: copays, deductibles, prescriptions, dental work, vision care, and many other medical costs.
  • If you leave your job, you keep your HSA balance but usually lose access to your FSA unless your employer offers continuation coverage.

Who can open an HSA versus an FSA

An HSA is only available if you are enrolled in a high-deductible health plan (HDHP). Your employer or your insurance broker can tell you whether your plan qualifies. Most HDHPs have a deductible of at least $1,600 for individual coverage or $3,200 for family coverage, though the exact threshold changes each year. If your plan does not meet that threshold, you cannot open an HSA, even if you want to.

An FSA is offered by your employer as part of their benefits package, and it works with any health insurance plan — including an HDHP. You do not need to meet any insurance requirements to open one. If your employer offers an FSA, you can usually enroll during the annual open enrollment period, which is often in the fall.

Some employers offer both. In that case, you can contribute to both an HSA and an FSA in the same year, but there are limits on how much you can put into the FSA if you also have an HSA.

What happens to money you do not spend

FSA money operates under a "use it or lose it" rule. Money you do not spend by the end of your plan year — usually December 31 — is forfeited and goes back to your employer. Some employers offer a grace period of up to 2.5 months into the next year, or a carryover of up to $640 (for 2024), but this varies. Check your plan documents or ask your benefits administrator what your employer allows.

HSA money is yours to keep. Any balance you do not spend rolls over to the next year, and the year after that. The money can sit in the account indefinitely and earn interest or be invested, much like a retirement account. This makes an HSA function as both a medical savings account and a long-term savings tool.

If you leave your job, you keep your HSA balance and can continue to use it for medical costs for the rest of your life. With an FSA, you typically lose access to the account when you leave, though some employers offer continuation coverage under COBRA rules.

How much you can contribute each year

FSA contribution limits are set by the IRS and change annually. For 2024, the limit is $3,300 for individual coverage. Some employers allow a higher limit — up to $4,150 — if they offer a dependent care FSA in addition to a medical FSA. You choose your contribution amount during open enrollment, and that amount is deducted from your paycheck in equal installments throughout the year.

HSA contribution limits also change each year and depend on your coverage type. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. If you are 55 or older, you can contribute an additional $1,000 per year. Unlike an FSA, you can contribute to an HSA on your own, not just through payroll deduction, though most people do it through their employer.

If you have both an HSA and an FSA, the FSA contribution counts toward a combined limit with the HSA. Your benefits administrator can explain how this works for your specific plan.

What medical costs both accounts cover

Both HSAs and FSAs cover a broad range of medical, dental, and vision expenses. This includes copays, coinsurance, deductibles, prescription medications, dental cleanings and fillings, vision exams and glasses, hearing aids, mental health counseling, and physical therapy. Over-the-counter medications like pain relievers and cold medicine are covered only if you have a prescription from a doctor.

Some costs are not covered by either account. These include cosmetic procedures (unless medically necessary), gym memberships, vitamins and supplements (unless prescribed), and long-term care insurance premiums. If you are unsure whether a specific cost is covered, you can ask your account provider or check the IRS Publication 502, which lists all allowable medical costs.

One key difference: if you use HSA money for a non-medical expense before age 65, you pay income tax on that money plus a 20 percent penalty. After age 65, you can withdraw HSA money for any reason without the penalty, though you still pay income tax on non-medical withdrawals. FSA money can only be used for medical costs; non-medical withdrawals are not allowed.

How to use the money when you need it

Most HSAs and FSAs come with a debit card linked to the account. You can use it to pay at the doctor's office, pharmacy, or dental clinic just like a regular debit card. The payment comes directly from your account balance.

If you do not have a debit card or prefer to pay out of pocket, you can request reimbursement. You pay the medical bill yourself, then submit a receipt or invoice to your account provider and request that they reimburse you. Reimbursement usually takes one to two weeks. You do not need to provide proof that the expense was medical — the receipt itself is enough.

Some account providers have online portals or mobile apps where you can submit receipts and track your balance. Others require you to mail in forms or call a customer service number. Check with your provider about their process.

How HSAs and FSAs affect your taxes

Money you contribute to either account is deducted from your gross income before federal income tax is calculated. This means you pay less in income tax that year. You also do not pay Social Security or Medicare taxes (FICA) on FSA contributions, which provides additional savings. HSA contributions made through payroll also avoid FICA taxes.

When you withdraw money to pay for a covered medical expense, that withdrawal is not taxed. You are essentially using pre-tax dollars to pay for medical costs, which is the main financial benefit of both accounts.

At tax time, you do not report HSA or FSA contributions or withdrawals on your tax return if they were for covered medical costs. The tax savings happen automatically through the payroll deduction process.

Frequently Asked Questions

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

Yes, but with restrictions. If you have an HDHP, you can open an HSA and also contribute to an FSA offered by your employer. However, the FSA contribution limit is reduced to $2,850 (for 2024) when you also have an HSA, to prevent double-dipping on tax savings.

What happens to my HSA if I change jobs?

Your HSA stays with you. The account is yours, not your employer's. You can continue to use it and contribute to it even after you leave the job, as long as you remain enrolled in an HDHP. If you switch to a different health plan that is not an HDHP, you can no longer contribute new money, but you can still withdraw existing funds for medical costs.

Can I use HSA or FSA money to pay for my spouse's medical costs?

Yes. Both accounts can be used to pay for medical costs of you, your spouse, and your dependents, regardless of whose name is on the account. You do not need to be on the same health insurance plan.

What if I contribute too much to my FSA and do not spend it all?

Money left over at the end of the plan year is forfeited, unless your employer offers a carryover or grace period. Some employers allow you to carry over up to $640 into the next year, or give you until March 15 of the following year to spend the remaining balance. Check your plan documents to see what your employer allows.

Can I withdraw HSA money for retirement?

Yes. After age 65, you can withdraw HSA money for any reason without the 20 percent penalty that applies to non-medical withdrawals before age 65. You will still owe income tax on non-medical withdrawals, but the penalty goes away. This makes an HSA a useful retirement savings tool if you do not spend all the medical money during your working years.