What HSA and FSA accounts are

A Health Savings Account (HSA) and a Flexible Spending Account (FSA) are both tax-advantaged accounts that let you set aside pre-tax money to pay for medical expenses. The money you put in reduces your taxable income for the year, and you withdraw it tax-free when you pay for may have access to medical costs. Both accounts are offered through your employer, though HSAs can also be opened independently if you have a high-deductible health plan.

The key difference is permanence: an HSA stays with you even if you change jobs, while an FSA is tied to your employer and typically ends when you leave. HSAs also let you carry unused money forward year to year, whereas FSAs operate on a "use it or lose it" basis — money left unspent at the end of the plan year is forfeited, though employers may allow a grace period or carryover of a small amount.

Both accounts work only if you enroll during your employer's open enrollment period, usually in the fall. If you miss that window, you cannot open an account until the next enrollment period, unless you experience a may have access to life event like losing health coverage or getting married.

Key Takeaways

  • HSA and FSA money is deducted from your paycheck before taxes, reducing what you owe to the IRS and stretching your healthcare budget.
  • You can only enroll during your employer's open enrollment period or after a may have access to life event; you cannot open an account mid-year otherwise.
  • HSAs are portable and let you keep unused money, while FSAs are employer-specific and usually require you to spend the money each year or lose it.
  • Both accounts cover the same types of medical expenses: copays, deductibles, prescriptions, dental work, vision care, and many other out-of-pocket costs.
  • If you withdraw money for non-medical reasons, you pay income tax on it plus a penalty, except in rare circumstances like disability or Medicare enrollment.

How the money flows and what you can spend it on

When you enroll in an HSA or FSA, you choose how much to contribute each year — typically between $50 and several thousand dollars, depending on the account type and your plan. Your employer deducts that amount from your paycheck in equal installments throughout the year, before income tax is calculated. You then receive a debit card or checkbook linked to the account, and you use it to pay for may have access to medical expenses at the point of care.

may have access to expenses include copays and coinsurance, deductibles, prescription medications, dental and vision care, mental health treatment, physical therapy, and medical equipment like blood pressure monitors or crutches. The IRS maintains a full list, but the general rule is that the expense must be for diagnosis, treatment, or prevention of disease — not for general wellness or cosmetic procedures. Gym memberships do not count, but prescription eyeglasses do.

Some expenses are less obvious: you can use HSA or FSA money for over-the-counter medications only if you have a prescription from your doctor, and you can pay for certain medical travel and lodging if it is directly tied to treatment. You cannot use the money for health insurance premiums, except in specific situations like COBRA continuation coverage or premiums you pay while unemployed.

HSA rules: portability and long-term growth

An HSA is designed to follow you throughout your career and into retirement. If you change jobs, the account remains yours — you do not forfeit the balance, and you can keep using it to pay for medical expenses. You can also invest the money in stocks, bonds, or mutual funds, similar to a retirement account, which means your balance can grow over time if you do not spend it all each year.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP), which the IRS defines as a plan with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage in 2024. These amounts change annually. Once you leave the HDHP — for example, by switching to a traditional health plan — you can no longer contribute new money to the HSA, but you keep the account and can continue to withdraw money for medical expenses.

Because HSAs are portable and grow over time, they function partly as a retirement savings tool. Many people use them to cover medical expenses in retirement, when healthcare costs typically rise. You can withdraw money for any reason after age 65, though non-medical withdrawals are taxed as income.

FSA rules: annual limits and the use-it-or-lose-it structure

An FSA is a simpler account with stricter rules. You choose a contribution amount each year during open enrollment, and that money is available to you throughout the plan year — usually January through December. Unlike an HSA, you cannot carry unused money forward; at the end of the year, any balance you have not spent is forfeited to your employer.

Some employers offer a grace period of up to 2.5 months into the next year, allowing you to spend the previous year's balance during that window. A few employers also allow you to carry over up to $610 (as of 2024) into the next year, though this varies by plan. Check your employer's specific FSA rules to know whether either option applies to you.

Because of the use-it-or-lose-it rule, you need to estimate your medical expenses carefully before enrolling. If you overestimate and do not spend the money, you lose it. If you underestimate, you will have to pay out of pocket for expenses beyond your FSA balance. Many people use FSAs strategically for predictable costs like prescription refills, dental cleanings, or vision exams that they know they will need during the year.

Tax savings and how much you actually save

The tax savings from HSA and FSA contributions depend on your income tax bracket. If you contribute $2,500 to an FSA and you are in the 22% federal tax bracket, you save roughly $550 in federal taxes that year — plus whatever you save in state and local taxes and the 7.65% in payroll taxes. The savings are real and immediate, appearing in your paychecks as a smaller tax withholding.

HSAs offer an additional advantage: the money grows tax-free if you invest it, and you pay no tax when you withdraw it for medical expenses. This makes HSAs particularly valuable if you can afford to contribute regularly and not spend the money immediately, allowing it to compound over decades.

The tradeoff is that you must predict your medical spending accurately. If you contribute money and do not use it (in an FSA) or if you withdraw it for non-medical reasons (in either account), you lose the tax benefit and may owe penalties. For this reason, HSAs and FSAs work best for people who have regular, predictable medical expenses or who can afford to set aside money without needing it immediately.

What happens if you withdraw money for non-medical reasons

If you use HSA or FSA money to pay for something that is not a may have access to medical expense, you must repay the tax benefit. You will owe income tax on the amount withdrawn, plus a 20% penalty on top of that. For example, if you withdraw $500 for a non-may have access to expense and you are in the 22% tax bracket, you owe $110 in taxes plus $100 in penalties — a total of $210 in addition to the $500 you already spent.

The only exceptions are rare: if you become disabled, you can withdraw HSA money penalty-free (though you still owe income tax). If you enroll in Medicare, you can stop contributing to an HSA without penalty, though again you owe tax on non-medical withdrawals. If you die, your beneficiary can withdraw the balance, though tax rules apply depending on who the beneficiary is.

Because of these penalties, it is important to keep receipts for all medical expenses you pay with HSA or FSA money and to be conservative in your estimates when enrolling. If you are unsure whether an expense qualifies, check the IRS list or ask your account administrator before spending the money.

Frequently Asked Questions

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

No. If you have an HSA, you cannot also have a traditional FSA because the two accounts would allow you to double-dip on tax savings. However, some employers offer a limited-purpose FSA that covers only dental and vision expenses, which you can pair with an HSA. Ask your employer whether this option is available in your plan.

What happens to my HSA or FSA if I leave my job?

With an HSA, the account is yours to keep. You can continue using it to pay for medical expenses, and you can invest the balance if you wish. With an FSA, the account ends when you leave your employer, and you forfeit any unused balance. Some employers allow you to use COBRA to continue your FSA for a limited time, but you must pay the full premium yourself.

Can I use my HSA or FSA to pay for my family members' medical expenses?

Yes. You can use the money to pay for medical expenses of your spouse and any dependents you claim on your tax return, even if they are not covered under your health plan. You do not need to be the one receiving the treatment — you just need to be responsible for the expense.

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

You lose it, unless your employer offers a grace period or carryover. Some employers allow you to spend the previous year's balance during a 2.5-month grace period into the new year, or to carry over up to $610 into the next year. Check your plan documents or ask your benefits administrator what your employer allows.

Can I change my HSA or FSA contribution amount during the year?

Only if you experience a may have access to life event, such as a change in income, marriage, divorce, birth of a child, or loss of health coverage. Otherwise, you are locked into your chosen amount for the entire plan year. This is why it is important to estimate carefully during open enrollment.