What Are HSA and FSA Cards and How Do You Use Them?

Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) offer valuable avenues for managing healthcare costs with tax advantages. These accounts often come with dedicated debit cards, simplifying the payment process for eligible medical expenses. Both types of accounts provide a way to set aside pre-tax money, often from paychecks, to cover qualified medical expenses, ultimately reducing taxable income.

HSA Cards Explained

A Health Savings Account (HSA) is a tax-advantaged savings account for individuals enrolled in a high-deductible health plan (HDHP). To qualify, a person must be covered by an HDHP that meets specific Internal Revenue Service (IRS) criteria. Contributions to an HSA offer a triple tax advantage: they are tax-deductible, grow tax-free, and withdrawals are tax-free when used for qualified medical expenses.

An HSA is owned by the individual, providing complete control over the funds. Unlike some other health accounts, HSA funds roll over from year to year and remain with the individual even if they change employers or retire. This portability allows the account to accumulate significant savings over time. Account holders can also invest the funds within their HSA, potentially growing their savings through various options such as mutual funds, stocks, or exchange-traded funds.

The HSA card functions as a debit card, providing direct access to the funds within the account. This card can be used at the point of sale, similar to a regular debit card, to pay for eligible medical expenses. However, the ability to contribute new funds to an HSA is contingent on continued enrollment in an HSA-eligible HDHP.

FSA Cards Explained

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax money for eligible healthcare expenses. Funds are typically contributed through pre-tax payroll deductions, which lowers an employee’s taxable income.

A primary characteristic of an FSA is the “use-it-or-lose-it” rule. However, employers can offer exceptions. One common option is a grace period, which allows an additional 2.5 months after the plan year ends to incur new expenses and use remaining funds. Alternatively, employers may permit a limited carryover of unspent funds into the next plan year.

The FSA card operates as a debit card, enabling convenient payment for qualified medical expenses directly from the account. FSA funds are intended for current year healthcare expenses, and the account is owned by the employer, not the employee.

Using Your Card for Qualified Medical Expenses

Both HSA and FSA cards are designed to pay for qualified medical expenses. These expenses include costs for the diagnosis, treatment, or prevention of disease. Common examples include doctor visits, prescription medications, dental care, vision care including eyeglasses and contact lenses, and many over-the-counter medicines and supplies.

Using the card is straightforward at various healthcare providers or pharmacies. A key aspect of using these cards is “substantiation.” The IRS requires that all transactions be verified to ensure they are for eligible medical expenses.

While many purchases at healthcare providers or merchants with an Inventory Information Approval System (IIAS) may be automatically substantiated at the point of sale, some transactions will require further documentation. Account holders should always retain itemized receipts for all purchases made with their HSA or FSA card. If a transaction cannot be auto-substantiated, the plan administrator will request these receipts to confirm eligibility, and failure to provide them may result in the expense being deemed ineligible. Maintaining thorough records is important for potential audits.

Distinguishing HSA and FSA Cards

HSAs and FSAs differ in several key ways:

Ownership and Portability

An HSA is owned by the individual, meaning the funds belong to them and remain accessible regardless of employment changes. In contrast, an FSA is employer-sponsored, and the account is owned by the employer. This difference impacts fund portability; HSA funds are fully portable, moving with the individual, while FSA funds are generally not.

Fund Rollover

Another significant difference concerns the rollover of funds. HSA balances roll over indefinitely from year to year, allowing for long-term savings and investment growth. Conversely, FSAs are subject to the “use-it-or-lose-it” rule, with limited exceptions for grace periods or a small carryover amount if the employer offers them.

Eligibility and Investment

Eligibility requirements also differ. An HSA can only be established by individuals enrolled in a high-deductible health plan (HDHP). FSAs, on the other hand, are typically offered by employers and can be available with a wider range of health plans. Furthermore, HSAs offer the unique ability to invest funds, allowing the account balance to potentially grow over time, similar to a retirement account. FSAs do not offer investment options.

Contribution Limits and Post-Employment Use

Contribution limits for HSAs and FSAs are determined by the IRS and vary annually. While both accounts offer tax advantages, their limits are distinct. Finally, the use of funds post-employment varies. HSA funds remain accessible and can be used in retirement for qualified medical expenses, or for any purpose after age 65, subject to income tax but no penalty. FSA funds generally cease with employment, though a run-out period for submitting claims for expenses incurred while employed may be available.