What Are FSA and HSA Cards and How Do They Work?

Health savings accounts (HSAs) and Flexible Spending Accounts (FSAs) offer individuals tax-advantaged ways to manage healthcare costs. These accounts provide a method to pay for eligible medical expenses, often accessed through dedicated debit cards.

Flexible Spending Accounts

A Flexible Spending Account (FSA) is an employer-sponsored benefit program. Employees fund these accounts primarily through pre-tax payroll deductions, which reduces their taxable income. Some employers may also contribute.

A defining characteristic of an FSA is the “use-it-or-lose-it” rule, meaning funds generally must be spent within the plan year. Some plans may offer a grace period of up to two and a half months or allow a limited amount to be carried over. Employees typically elect their annual contribution at the beginning of the plan year, which generally cannot be changed unless there is a qualifying life event. Since FSAs are employer-sponsored, the account is tied to employment, and funds may be forfeited if employment ends.

FSA funds are readily accessible via a linked debit card, allowing direct payment for qualified medical expenses at healthcare providers, pharmacies, and other eligible merchants. The entire elected contribution is typically available from the first day of the plan year, even if not yet fully deducted from paychecks. This immediate access can be helpful for unexpected medical expenses.

Health Savings Accounts

A Health Savings Account (HSA) is a personal savings account for healthcare expenses, owned by the individual. Contributions can come from the employee, an employer, or third parties. These contributions are generally tax-deductible.

A key requirement for an HSA is enrollment in a High-Deductible Health Plan (HDHP). Unlike FSAs, HSA funds roll over year after year and remain with the individual, making them fully portable. This portability allows the account to accumulate funds over time. HSAs also offer investment potential, allowing unused funds to grow.

HSAs have a “triple tax advantage”: contributions are tax-deductible, investment earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. HSAs also come with a debit card for direct access to funds.

Key Differences and Similarities

Flexible Spending Accounts and Health Savings Accounts share the goal of providing tax-advantaged ways to pay for medical expenses, but differ in structure and benefits. HSAs require enrollment in a High-Deductible Health Plan (HDHP), while FSAs are employer-sponsored and have no such health plan prerequisite.

HSAs are owned by the individual and are portable, moving with the individual regardless of employment changes. FSAs are employer-sponsored, and funds are generally tied to that employment, often forfeited if employment ends.

HSA funds roll over indefinitely, allowing balances to grow over many years. FSAs operate under a “use-it-or-lose-it” rule, where unspent funds at year-end are generally forfeited. Some FSA plans offer a grace period or permit a small amount to be carried over.

Both account types have annual contribution limits set by the Internal Revenue Service, which differ. Both allow pre-tax contributions, reducing current taxable income. HSAs offer an additional tax benefit: funds can be invested, and earnings grow tax-free. Withdrawals for qualified medical expenses are tax-free from both.

The ability to invest funds is exclusive to HSAs, allowing balances to grow over time. FSA funds cannot be invested. After age 65, HSA funds can be withdrawn for non-medical expenses without penalty, subject to ordinary income tax. This option is not available with FSAs, which must always be used for qualified medical expenses.

Using Your Card Funds

Both FSA and HSA cards provide direct access to funds for qualified medical expenses. The Internal Revenue Service (IRS) defines qualified medical expenses, with IRS Publication 502 as a guide. Eligible expenses include doctor visits, prescription medications, dental care, vision care, and certain medical equipment.

These cards function like standard debit cards. They can be used at healthcare providers’ offices, pharmacies, and some retail stores with inventory information approval systems (IIAS) that identify eligible purchases. Retain receipts and documentation for all purchases. Plan administrators may require substantiation of expenses, especially for transactions at merchants without IIAS, to ensure funds were used for qualified medical purposes.

Certain expenses are not considered qualified medical expenses and cannot be paid for with FSA or HSA funds. These include cosmetic procedures, general health supplements unless prescribed, and gym memberships. Using funds for non-qualified expenses can lead to adverse tax consequences, including the amount being treated as taxable income and potential IRS penalties. For HSAs, a 20% penalty applies to non-qualified withdrawals before age 65, in addition to being taxed as ordinary income.