What Is an HSA or FSA Card & How Do They Work?

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) offer tax-advantaged ways to manage healthcare expenses. These accounts allow individuals to set aside pre-tax money for qualified medical needs. A dedicated debit card is often linked to these accounts, providing a convenient method to access funds directly. This simplifies payment for eligible healthcare services and products.

Understanding HSAs and FSAs

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) serve as distinct mechanisms for managing healthcare expenditures with tax advantages. An HSA is a personal savings account for individuals enrolled in a high-deductible health plan (HDHP). Contributions are typically pre-tax, funds can grow tax-free through investments, and qualified withdrawals are also tax-free. The individual owns this account, retaining it even when changing employers or retiring, allowing funds to accumulate year after year.

A Flexible Spending Account (FSA) is an employer-sponsored benefit. It allows employees to set aside pre-tax money from their paycheck for eligible medical expenses. Unlike HSAs, FSAs are generally subject to a “use-it-or-lose-it” rule, meaning unspent funds at year-end may be forfeited. Some plans offer limited grace periods or carryover options. FSA funds are typically available at the beginning of the plan year, even before the full amount has been contributed through payroll deductions.

Both HSAs and FSAs are associated with a dedicated debit card. This card functions like a standard debit card, providing direct access to account funds. Its primary purpose is to simplify payment for qualified healthcare services and products at the point of sale, often reducing the need for out-of-pocket payments followed by reimbursement claims. These cards are programmed to work specifically for eligible medical expenses.

Establishing Your Account

Establishing an HSA or FSA requires meeting specific eligibility criteria and following enrollment procedures. For an HSA, individuals must be covered under a high-deductible health plan (HDHP) and generally not have other disqualifying health coverage, such as Medicare enrollment or being claimed as a dependent on another person’s tax return. For 2025, an HDHP has a minimum deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. Maximum out-of-pocket expenses cannot exceed $8,300 for self-only or $16,600 for family coverage.

Eligible individuals can open an HSA through financial institutions or employer-provided options. Individuals elect their contribution amount, with 2025 annual limits at $4,300 for self-only coverage and $8,550 for family coverage. Those aged 55 and older can make an additional $1,000 “catch-up” contribution annually. Essential information needed for setup includes personal details like Social Security number, contact information, and health plan specifics.

FSAs are employer-offered benefits. Employees must enroll during their employer’s designated open enrollment period, typically once a year. Enrollment is also possible after a qualifying life event, such as marriage or the birth of a child. Individuals elect a contribution amount from their paycheck, with the 2025 limit for healthcare FSAs set at $3,300 per employer. FSA enrollment is not automatic and requires re-election each plan year.

Using Your Card for Qualified Expenses

Once an HSA or FSA is established, the associated debit card offers a convenient way to pay for eligible healthcare costs directly. This card functions like a regular debit card, drawing funds from the account. These cards are specifically for medical expenses and cannot be used for cash withdrawals.

The IRS defines “qualified medical expense” through guidance like IRS Publication 502. These generally include costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for treatments affecting any part or function of the body. Common examples include doctor visits, prescription medications, dental care, and vision services. Many over-the-counter medicines and products are also eligible. Expenses for general health benefits, such as vitamins or gym memberships, are typically not eligible unless medically necessary.

Substantiation is crucial, especially for FSAs. The IRS mandates that all FSA transactions be verified as eligible expenses. While many transactions are automatically substantiated, manual substantiation may be required. For HSAs, individuals are responsible for maintaining detailed records for potential IRS audits.

Always retain itemized receipts for all purchases made with your HSA or FSA card. Receipts must clearly show the provider’s name, date of service or purchase, item description, and amount. Generic credit card receipts or canceled checks are not considered sufficient documentation. If a transaction cannot be auto-substantiated, the plan administrator will request this documentation. Failure to provide proof can lead to card deactivation and owing taxes on unsubstantiated amounts. For an HSA, using funds for non-qualified expenses while under age 65 can result in a 20% penalty.

Managing Your Funds

Managing funds in an HSA differs significantly from an FSA. An HSA is inherently portable; the individual owns the account. This allows the account holder to retain HSA funds regardless of employment changes or retirement. Unlike FSAs, HSA balances automatically roll over year to year, eliminating “use-it-or-lose-it” restrictions and enabling substantial growth.

A significant advantage of HSAs is the ability to invest funds. This investment feature allows money to grow tax-free. Upon reaching age 65, HSA funds can be withdrawn for any purpose without penalty, though non-medical withdrawals are subject to income tax. Withdrawals for qualified medical expenses remain tax-free throughout the account holder’s lifetime.

Flexible Spending Accounts are employer-sponsored benefits, and unused funds typically remain with the employer. FSAs operate under a strict “use-it-or-lose-it” rule, requiring funds to be spent by year-end or be forfeited. To mitigate this, employers may offer a grace period of up to an additional 2.5 months to incur expenses, or a limited carryover of unused funds into the next plan year. For 2025, the maximum carryover amount is $660. Employers can choose to offer only one of these options, or neither. The full elected FSA amount is generally available on the first day of the plan year, providing immediate access to funds.