What Are FSAs and HSAs and What Is the Difference?

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) serve as specialized savings vehicles designed to assist individuals in managing healthcare expenses. These accounts allow for the use of tax-advantaged funds to cover medical, dental, and vision costs. While both aim to alleviate the financial burden of healthcare, they operate under distinct rules and eligibility criteria. Understanding the characteristics of each account is helpful for individuals seeking to optimize their healthcare spending and tax planning.

Flexible Spending Accounts

A Flexible Spending Account (FSA) is an employer-sponsored benefit. Employees contribute to an FSA through pre-tax payroll deductions, which reduces their taxable income. The employer owns the FSA, and funds remain with the employer if the employee leaves the company, though some plans allow a short period to incur expenses after termination. For 2025, the maximum employee contribution to a health FSA is $3,300.

FSAs cover a broad range of eligible medical, dental, and vision expenses. These include deductibles, co-payments, and prescription medications. A defining characteristic of FSAs is the “use-it-or-lose-it” rule, meaning funds not spent by the end of the plan year are forfeited. Employers can offer two exceptions to this rule.

One exception is a grace period, which allows an additional two months and 15 days to use remaining funds from the previous plan year. During this period, employees can incur new eligible expenses against the prior year’s balance. Alternatively, employers may permit a limited amount of unused funds to be carried over into the next plan year. For 2025, the maximum carryover amount is $660. An employer can offer either a grace period or a carryover, but not both.

Health Savings Accounts

A Health Savings Account (HSA) is a personal savings account designed for healthcare expenses. To be eligible for an HSA, an individual must be enrolled in a High-Deductible Health Plan (HDHP). An HDHP is a health insurance plan with a higher annual deductible and a maximum limit on out-of-pocket expenses. For 2025, an HDHP must have a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage. The annual out-of-pocket expenses, including deductibles and co-payments, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage.

Contributions to an HSA can be made by the individual, their employer, or both. Individual contributions are tax-deductible, even for those who do not itemize deductions. For 2025, the maximum contribution limit for self-only HDHP coverage is $4,300, and for family HDHP coverage, it is $8,550. Individuals aged 55 and over can contribute an additional $1,000 annually as a catch-up contribution.

HSA funds roll over year after year and do not expire. This allows individuals to accumulate substantial savings over time. HSA funds can be invested, offering an opportunity for tax-free growth. Many HSA providers offer various investment options. The individual maintains ownership of the HSA, making it portable even if they change employers or health plans.

Understanding Key Differences

The eligibility criteria for FSAs and HSAs represent a distinction. FSAs are employer-sponsored benefits, meaning access depends on the employer offering such a plan. In contrast, HSA eligibility is tied to enrollment in a High-Deductible Health Plan, which can be obtained independently or through an employer.

Ownership and portability also differ between the two accounts. An FSA is owned by the employer, and funds are forfeited if employment ends. Conversely, an HSA is owned by the individual, providing complete portability; the account and its funds move with the individual regardless of employment changes.

The treatment of unused funds highlights another difference. HSAs permit all unused funds to roll over from one year to the next, allowing for long-term savings accumulation. FSAs are subject to a “use-it-or-lose-it” rule, although employers may offer a grace period or a limited carryover amount.

Investment opportunities further distinguish these accounts. HSA funds can be invested, allowing for tax-free growth over time. FSA funds are not invested; they are meant for immediate or short-term healthcare expenses.

Using Your Funds

Both FSAs and HSAs are designed to cover qualified medical expenses. These expenses include doctor visits, prescription medications, dental treatments, and vision care. Over-the-counter medications and menstrual care products are also eligible. Some expenses may require a letter of medical necessity from a healthcare provider to be eligible.

Maintaining documentation for all expenses paid with FSA or HSA funds is important. This includes keeping receipts, Explanation of Benefits (EOB) statements, and medical diagnosis letters or prescriptions. This documentation serves as proof of eligibility for reimbursement and is useful in the event of an IRS audit.

The process for using funds involves either a debit card provided by the account administrator or submitting claims for reimbursement. When using a debit card, it is still necessary to save receipts as the transaction may require further verification. For reimbursements, individuals pay out-of-pocket and then submit documentation to their plan administrator for payment from their account.

Using HSA funds for non-qualified expenses before age 65 carries specific tax implications. Such withdrawals are subject to income tax and an additional 20% penalty. After age 65, the 20% penalty is waived, but withdrawals for non-qualified expenses are still taxed as ordinary income. For FSAs, using funds for non-qualified expenses or failing to use them by the deadline results in forfeiture, rather than a penalty or additional tax.