What Is a Health Equity Account & How Does It Work?

Many individuals search for ways to manage healthcare costs. While “Health Equity Account” might suggest a healthcare savings vehicle, it is not a recognized financial product. Instead, Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) offer tax advantages for saving and spending on qualified medical expenses.

Understanding the features and distinctions of HSAs and FSAs can help individuals make informed decisions about managing healthcare finances. Both offer benefits for covering medical costs, but they differ significantly in structure, eligibility, and potential for long-term accumulation. This overview details how HSAs and FSAs function, their benefits, and how they can be used to address future medical needs.

Understanding Health Savings Accounts

A Health Savings Account (HSA) is a tax-advantaged savings account for individuals enrolled in a High-Deductible Health Plan (HDHP). Funds within an HSA belong to the individual, providing flexibility and control over their healthcare savings.

To be eligible for an HSA, an individual must be covered under an HDHP. For 2025, an HDHP must have a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage. The out-of-pocket maximum cannot exceed $8,300 for self-only coverage or $16,600 for family coverage in 2025. Individuals cannot be enrolled in Medicare, have other health coverage (with certain exceptions), or be claimed as a dependent on someone else’s tax return.

HSAs offer a “triple tax advantage.” Contributions are tax-deductible, reducing taxable income. Funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

The ability to invest HSA funds allows them to grow over time, similar to a retirement account. Common investment options include stocks, bonds, ETFs, and mutual funds, depending on the HSA custodian. Many HSAs require a minimum balance before allowing investment.

The IRS sets annual contribution limits for HSAs. For 2025, individuals with self-only HDHP coverage can contribute up to $4,300, while those with family HDHP coverage can contribute up to $8,550. An additional $1,000 “catch-up” contribution is permitted for individuals aged 55 and over. Employer contributions also count toward these limits.

Qualified medical expenses, as defined by IRS Publication 502, cover a broad range of healthcare services and products. These include doctor visits, hospital stays, prescription medications, dental care, vision care, and certain over-the-counter medications. Funds can be used for the account owner, their spouse, and eligible dependents. After age 65, HSA funds can be withdrawn for non-medical expenses without penalty, though these withdrawals are subject to ordinary income tax.

HSAs are portable; the account belongs to the individual, not the employer. This means the HSA remains with the individual even if they change jobs or retire. Unused funds roll over year after year, allowing individuals to accumulate substantial savings for future medical expenses, including those in retirement.

Understanding Flexible Spending Accounts

A Flexible Spending Account (FSA) is a common employer-sponsored benefit allowing employees to set aside pre-tax money for qualified medical expenses. Unlike HSAs, FSAs are typically offered as part of an employer’s benefits package, meaning self-employed individuals cannot establish an FSA.

Contributions are made with pre-tax dollars, reducing the employee’s taxable income. Employees elect an annual contribution amount during open enrollment, and funds are deducted from paychecks throughout the plan year.

The IRS sets annual contribution limits for FSAs. For 2025, the maximum an employee can contribute to a healthcare FSA is $3,300. If both spouses have access to an FSA, they can each contribute up to this limit.

A key characteristic of FSAs is the “use-it-or-lose-it” rule. Funds not used by the end of the plan year are generally forfeited. Employers can offer a grace period of up to two and a half months, or a limited carryover of unused funds into the next plan year. For 2025, the maximum carryover is $660. Employers can offer one option, but not both.

Qualified medical expenses for FSAs are similar to those for HSAs, covering a range of healthcare, dental, and vision services as outlined by IRS Publication 502. Funds are typically available at the beginning of the plan year, even if the employee has not yet contributed the full amount. However, if an employee terminates employment, FSA funds are generally lost, as FSAs are not portable.

Key Differences and Suitability

Choosing between an HSA and an FSA depends on an individual’s specific health plan, financial situation, and healthcare spending habits.

Eligibility

HSAs require enrollment in a High-Deductible Health Plan (HDHP). FSAs are employer-sponsored benefits, available regardless of health plan type, and self-employed individuals cannot open an FSA.

Ownership and Portability

An HSA is owned by the individual, with funds remaining even if they change jobs or retire, allowing for long-term accumulation. An FSA is employer-owned, and funds are generally forfeited if employment ends, making them less portable.

Investment Potential

HSAs allow funds to grow tax-free over time, similar to a retirement account. FSAs do not offer investment options; they are designed for short-term spending on current medical expenses.

“Use-It-Or-Lose-It” Rule

FSAs require funds to be spent by the end of the plan year or within a limited grace period or carryover. HSAs are exempt from this rule, as unused funds automatically roll over year to year.

Contribution Limits and Tax Advantages

For 2025, HSAs allow higher contributions ($4,300 for self-only, $8,550 for family, plus $1,000 catch-up for those 55+). FSAs have a lower limit ($3,300 for 2025). HSAs offer a “triple tax advantage” (tax-deductible contributions, tax-free growth, tax-free withdrawals). FSAs offer pre-tax contributions that reduce taxable income.

HSAs are generally more suitable for individuals comfortable with an HDHP, who have low immediate medical expenses, and seek a long-term savings and investment vehicle. FSAs are often a better fit for those with higher, predictable annual medical expenses who want to reduce taxable income, but do not require the long-term investment potential or portability of an HSA. Individuals must assess their health plan, anticipated medical needs, and financial goals to determine which account best suits their circumstances.