FSA and HSA: How These Tax-Advantaged Accounts Work

FSA and HSA are separate accounts that let you set aside pre-tax money for medical costs, but they work differently and have different rules

A Flexible Spending Account (FSA) and a Health Savings Account (HSA) both let you pay for medical expenses with money that hasn't been taxed yet. That means if you set aside $2,000 in either account, you don't pay income tax on that $2,000. The main difference is who can open one, how much you can save, and what happens to the money if you don't spend it.

FSAs are offered through your employer's benefits plan. HSAs are tied to a high-deductible health insurance plan and you can open one on your own, even if your employer doesn't offer it. An FSA is "use it or lose it" — money left over at the end of the year usually disappears. An HSA rolls over year to year and grows like a savings account, so you can let it build up.

Key Takeaways

FSAs are employer-sponsored and have a "use it or lose it" rule, meaning unspent money at the end of the year is forfeited, though some plans allow a small carryover or grace period.
HSAs are individual accounts tied to high-deductible health plans and let you keep unused money indefinitely, making them a long-term savings tool.
Both accounts use pre-tax dollars, which reduces the amount of income tax you owe, but FSAs have lower annual contribution limits than HSAs.
You can use money from either account to pay for the same types of medical expenses: copays, deductibles, prescriptions, dental work, and vision care.
If you leave your job, you lose access to your FSA balance, but you keep your HSA and can take it with you to any new employer or keep it open independently.

How FSAs work and who can use them

Your employer sets up an FSA as part of the health benefits package. You decide how much to contribute each year during open enrollment, and that money comes out of your paycheck before taxes are calculated. For 2024, the FSA contribution limit is $3,200 per year. You can use the money to pay for copays, deductibles, prescriptions, dental work, vision care, and other may have access to medical expenses.

The catch is the "use it or lose it" rule. Any money left in your FSA at the end of the plan year is forfeited — you don't get it back. Some employers offer a grace period (usually 2.5 months into the next year) or let you carry over a small amount (typically $610 in 2024), but this varies by plan. You have to check your specific plan documents to know what happens to leftover money.

If you leave your job, you lose the FSA. You have a limited window (usually 30 to 60 days) to spend remaining money through COBRA or a similar continuation plan, but after that, any balance is gone. This makes FSAs riskier if you're not sure how much medical spending you'll have in a given year.

How HSAs work and who can use them

An HSA is available only if you're enrolled in a high-deductible health plan (HDHP) — a plan with a higher deductible and lower premiums than a standard plan. You can open an HSA through your employer if they offer one, or you can open one on your own through a bank or investment company. For 2024, the contribution limit is $4,150 for individual coverage and $8,300 for family coverage.

Unlike an FSA, money in an HSA rolls over year to year. You don't have to spend it or lose it. This means you can let the account grow and use it as a long-term medical savings tool. Some HSAs let you invest the money in stocks or bonds, so it can grow beyond what you contribute. You can withdraw money tax-free as long as you use it for may have access to medical expenses.

If you change jobs, you keep your HSA. The account stays in your name and you can take it with you. If you leave a high-deductible plan and switch to a standard plan, you can no longer contribute new money to the HSA, but you can still withdraw from it for medical expenses. This portability makes HSAs much more flexible than FSAs.

What expenses you can pay for with either account

Both FSAs and HSAs cover the same types of medical costs. You can use the money for copays and coinsurance, deductibles, prescription medications, dental work (cleanings, fillings, orthodontics), vision care (glasses, contacts, exams), hearing aids, mental health counseling, physical therapy, and many other treatments. The IRS maintains a detailed list of may have access to expenses, and both accounts follow the same rules.

Some costs are not covered. You cannot use FSA or HSA money for cosmetic procedures, gym memberships, over-the-counter medications (unless prescribed by a doctor), or health insurance premiums (with limited exceptions). If you're unsure whether a specific expense qualifies, check the IRS publication 502 or ask your account administrator before you pay.

The tax advantage and how much you actually save

The main benefit of both accounts is the tax savings. When you contribute money to an FSA or HSA, you don't pay federal income tax, Social Security tax, or Medicare tax on that money. If you're in the 22% tax bracket and contribute $2,000 to an FSA, you save $440 in federal taxes alone. Add state and payroll taxes and the savings can be 30% or more, depending on where you live.

This is different from a regular savings account or credit card rewards. You're not getting a discount on medical costs themselves — you're just avoiding taxes on the money you spend. The savings come from paying less tax overall, not from paying less to the doctor or pharmacy.

When to choose an FSA versus an HSA

Choose an FSA if you have predictable medical expenses each year and want to reduce your taxable income without worrying about long-term savings. FSAs work well if you know you'll spend the money on copays, prescriptions, or dental work within the plan year. The lower contribution limit ($3,200) is less of a concern if you don't have large medical costs.

Choose an HSA if you want to build a medical savings cushion over time, if you have a high-deductible plan, or if you think you might change jobs. HSAs are better for people who can afford to contribute more than they spend in a given year and let the account grow. If you're young and healthy with low medical costs, an HSA can become a powerful savings tool — some people use it as a retirement account for medical expenses later in life.

Some people have both. If your employer offers an FSA and you're also enrolled in an HDHP with an HSA, you can contribute to both in the same year, though there are limits on how much you can put in the FSA if you have an HSA. Talk to your benefits administrator about whether this combination makes sense for your situation.

What happens to the money if you don't use it

With an FSA, unspent money is lost at the end of the plan year unless your employer allows a carryover or grace period. Some plans let you carry over up to $610 into the next year (2024 limit), and some give you until mid-April to spend remaining money. Check your plan documents or ask your HR department what your specific plan allows. If you have money left over and no carryover option, you lose it — there's no way to get it back.

With an HSA, unspent money stays in your account forever. You can let it sit there, spend it next year, or use it decades later in retirement. There's no deadline to use the money and no penalty for leaving it alone. This is one of the biggest advantages of HSAs over FSAs.

Frequently Asked Questions

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

You can have both if your employer offers an FSA and you're enrolled in a high-deductible health plan with an HSA. However, if you have an FSA, you cannot contribute to a limited-purpose FSA (which covers only dental and vision). Talk to your benefits administrator about contribution limits and how the two accounts interact.

What happens to my FSA if I leave my job?

You lose access to your FSA balance. You may be able to continue coverage through COBRA for a limited time and spend remaining money, but after that period ends, any unspent balance is forfeited. Your HSA, by contrast, stays with you and moves to your new employer or remains in your name.

Can I use my HSA for expenses that happened before I opened the account?

No. You can only use HSA money for may have access to medical expenses that occur after the account is opened. However, you can withdraw money for past expenses if you kept receipts and didn't claim them on your tax return. This is called a "retroactive reimbursement."

What if I withdraw money from my HSA for something that's not a medical expense?

If you withdraw money from an HSA for a non-may have access to expense before age 65, you owe income tax on that amount plus a 20% penalty. After age 65, you can withdraw money for any reason without the penalty, but you still owe income tax on non-medical withdrawals. FSAs don't allow non-medical withdrawals at all.

Do I have to spend my FSA money by a certain date each year?

Yes, usually by the end of the plan year (often December 31), though some plans offer a grace period of up to 2.5 months into the next year. Check your plan documents or ask your HR department for your specific deadline. Any money not spent by that date is forfeited.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.