What a health care spending account actually is

A health care spending account is a way to set aside pre-tax money from your paycheck to pay for medical expenses that your insurance doesn't cover. You decide how much to contribute each year, your employer deducts that amount before taxes are calculated, and you use the money to pay for things like copays, deductibles, prescription drugs, dental work, and vision care. The money stays in an account you control, and you draw from it as you need it.

The key difference from a regular savings account is the tax advantage: money you put in reduces your taxable income for that year. If you earn $50,000 and contribute $2,500 to a health care spending account, you only pay income tax on $47,500. That's the entire point of the account existing.

These accounts come in two main types, and they work differently. A Flexible Spending Account (FSA) is offered by your employer and has strict rules about what you can spend on and what happens to unused money. A Health Savings Account (HSA) is tied to a specific type of health insurance plan and lets you carry money forward year to year. Most people have access to one or the other, not both, depending on their employer and insurance choice.

Key Takeaways

  • Health care spending accounts let you use pre-tax money to pay medical costs your insurance doesn't cover, reducing the amount of income you owe tax on.
  • FSAs are employer-run accounts where unused money is typically forfeited at the end of the year, while HSAs let you keep unused money and carry it forward indefinitely.
  • You can only open an FSA through your employer during open enrollment, but you can open an HSA on your own if you have a high-deductible health plan.
  • may be able to access expenses include copays, deductibles, prescription drugs, dental work, vision care, and some medical equipment, but not insurance premiums or over-the-counter items without a prescription.

How FSAs and HSAs differ in what you can do with the money

An FSA is a "use it or lose it" account. You choose an amount to contribute at the start of the year—usually between $100 and $3,200 depending on your employer's plan—and that money sits in the account. You spend it on may be able to access medical expenses throughout the year. If you don't spend it all by December 31, you lose the remainder. Some employers offer a grace period of up to 2.5 months into the next year, or let you carry forward up to $610 (the amount changes yearly), but most do not. This creates real pressure to estimate correctly.

An HSA works the opposite way. You contribute money, you spend it on may be able to access medical expenses, but any money left over stays in the account and rolls forward to next year. You can let it accumulate for years. Some HSAs even let you invest the balance in stocks or bonds, turning it into a long-term savings vehicle. The catch is that you can only open an HSA if your health insurance is a high-deductible plan—meaning your deductible is at least $1,500 for individual coverage or $3,000 for family coverage (these amounts change yearly).

Both accounts use a debit card or reimbursement process to access the money. With an FSA, your employer typically issues a card that works at pharmacies and medical offices. With an HSA, the bank or financial institution holding your account issues the card. Either way, you swipe it at the point of care, or you pay out of pocket and submit a receipt for reimbursement later.

What expenses you can and cannot pay for

The IRS maintains a specific list of may be able to access medical expenses. Copays, coinsurance, and deductibles are always may be able to access. Prescription medications are may be able to access. Dental work—cleanings, fillings, root canals, orthodontics—is may be able to access. Vision care, including eye exams, glasses, and contact lenses, is may be able to access. Medical equipment like crutches, wheelchairs, blood pressure monitors, and glucose meters is may be able to access. Physical therapy, mental health counseling, and chiropractic care are may be able to access if a doctor prescribes them.

What's not may be able to access: health insurance premiums (with one exception: if you're receiving unemployment benefits, you can use an HSA to pay COBRA premiums). Over-the-counter medications like ibuprofen or cold medicine are not may be able to access unless you have a prescription from a doctor. Cosmetic procedures are not may be able to access. Gym memberships and wellness programs are not may be able to access, even if your employer recommends them. Sunscreen, toothpaste, and other hygiene products are not may be able to access.

The rules are the same for FSAs and HSAs. If you're unsure whether something qualifies, your account administrator can tell you, or you can check the IRS publication 502, which lists may be able to access expenses in detail. Some employers also provide a list of pre-approved items.

How much you can contribute and when

For an FSA, your employer sets the contribution limit, but the IRS caps it at $3,200 per year (this amount increases periodically). You choose your contribution amount during your employer's open enrollment period, which usually happens once a year in the fall. The money is deducted from your paycheck in equal amounts throughout the year. If you have a may have access to life event—you get married, have a child, lose other health coverage—you can change your contribution mid-year, but otherwise you're locked in.

For an HSA, the IRS sets the contribution limit: $4,150 for individual coverage and $8,300 for family coverage in 2024 (these amounts increase yearly). You can open an HSA through your employer if they offer one, or you can open one on your own through a bank or financial institution. You can contribute at any time during the year, and you have until the tax filing important date (usually April 15) to make contributions for the previous year. This flexibility is one reason HSAs appeal to self-employed people and those who switch jobs.

What happens to the money if you change jobs or leave your employer

An FSA is tied to your employer. If you leave the job, the account closes. You have a short window—usually 60 to 90 days—to spend any remaining balance, or you lose it. Some employers let you continue the FSA for a limited time under COBRA (the law that lets you keep health coverage after leaving a job), but you pay the full premium yourself, and the FSA still closes at the end of the year. This is a major limitation: if you leave your job in June with $1,500 left in your FSA, you cannot straightforward take it with you.

An HSA is yours to keep. It's not tied to your employer. If you leave your job, the account stays open and the money is still yours. You can continue to use it for may be able to access medical expenses for the rest of your life. You can even pass it to your heirs when you die (though there are tax consequences). This portability is a significant advantage, especially if you change jobs frequently or plan to retire early.

How to open an FSA or HSA and what documents you need

To open an FSA, you must be offered one by your employer. You enroll during open enrollment by selecting the account and choosing your contribution amount. You'll receive plan documents that explain the rules, the may be able to access expenses, and how to access the money. No separate process is required—your employer handles everything. If you miss open enrollment, you cannot open an FSA until the next enrollment period, unless you have a may have access to life event.

To open an HSA, you first need a high-deductible health plan. If your employer offers one, you can enroll during open enrollment. If you don't have employer coverage or your employer doesn't offer a high-deductible plan, you can buy one on your own through the health insurance marketplace. Once you have the plan, you can open an HSA through a bank, credit union, or investment firm. You'll need your Social Security number, proof of the high-deductible plan (your insurance card or enrollment confirmation), and a valid ID. The process takes about 15 minutes online, and the account is usually active within a few business days.

The tax advantage and what it actually saves you

The tax savings come from two places. First, money you contribute to an FSA or HSA is deducted from your paycheck before income tax is calculated, so you pay less federal income tax. Second, you don't pay payroll tax (Social Security and Medicare tax) on the money either. This is different from a regular savings account, where you contribute after-tax money.

The actual savings depends on your tax bracket. If you're in the 22% federal tax bracket and contribute $2,500 to an FSA, you save about $550 in federal income tax. Add state income tax (which varies by state) and payroll tax, and the total savings could be $700 or more. For someone in the 32% bracket, the savings on the same contribution could exceed $900. This is why people with predictable medical expenses—regular prescriptions, ongoing dental work, annual vision exams—benefit most from these accounts.

Frequently Asked Questions

Can I use my FSA or HSA to pay for my spouse's medical expenses?

Yes, as long as your spouse is a dependent on your tax return. You can also use the account to pay for your children's medical expenses and your parents' medical expenses if they may have access to as dependents. The money doesn't have to be spent on the person whose name is on the account.

What happens if I use my FSA card for something that's not may be able to access?

If you swipe the card for an ineligible expense, the transaction may be declined at the point of sale. If it goes through, your account administrator will likely contact you and ask you to reimburse the account. Repeated misuse can result in the account being closed.

Can I have both an FSA and an HSA at the same time?

No. If you have an HSA, you cannot have an FSA (with one narrow exception: a limited-purpose FSA that only covers dental and vision expenses). The IRS treats them as mutually exclusive to prevent double-dipping on the tax advantage.

What if I don't spend all my HSA money by the end of the year?

Unlike an FSA, the money stays in your account and carries forward indefinitely. You can spend it next year, in five years, or in retirement. Some people use HSAs as a retirement savings tool, letting the balance grow and only withdrawing for medical expenses in later years.

Can I withdraw HSA money for non-medical expenses?

Yes, but you'll owe income tax on the withdrawal plus a 20% penalty if you're under 65. After 65, you can withdraw for any reason without the penalty, though you still owe income tax on non-medical withdrawals. This makes an HSA useful as a backup retirement account if you have other savings for medical costs.