Health Savings Accounts (HSAs) vs Flexible Spending Accounts (FSAs): What you need to know!

Tax-advantaged accounts like health savings accounts (HSAs) and flexible spending accounts (FSAs) can help taxpayers manage medical expenses while reducing taxable income. Although these accounts sound similar, they have important differences, including who can contribute and how funds can be used. 

Key features of HSAs:

An HSA is a tax-advantaged account you can use to pay for qualified medical expenses. To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). 

• Triple tax advantage - Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified expenses are also tax-free. 

• Ownership - The account is yours. Funds stay with you even if you change jobs, retire, or switch health plans. 

• Rollover - Unused funds roll over from year to year without limit. 

• Portability - You can transfer or roll over an HSA between financial institutions. 

• Contribution limits - For 2026, the limits increase to $4,400 for self-only coverage and $8,750 for family coverage. If you’re age 55 or older, you can contribute an additional $1,000 as a catch-up contribution. 

  
  

Key features of FSAs:

An FSA is an employer-sponsored benefit that allows employees to set aside pre-tax money to pay for eligible medical expenses. 

• Tax savings - Contributions are made pre-tax, lowering your taxable income. 

• Use-it-or-lose-it - Funds must generally be used by the end of the plan year. Some employers offer either a grace period of up to 2.5 months or a carryover of up to $680 (2026 limit) into the next plan year, but not both. 

• Employer-sponsored - FSAs are only available if your employer offers them; you cannot open an FSA on your own behalf. 

• Contribution limits - For 2026, the limits increase to $3,400 for medical FSAs and $7,500 for dependent care FSAs. 

Differences between HSAs and FSAs 

While both accounts help reduce health care costs, their rules and advantages differ.

Who should consider an HSA? 

HSAs are best suited for taxpayers who: 

• Are enrolled in an HDHP 

• Plan to save for current or future medical expenses 

• Have enough cash flow to pay for routine care out of pocket, while building a tax-free nest egg for major expenses or retirement health care costs 

• Prefer an account that carries over each year without a deadline to spend the balance 

  
  

HSAs can also double as supplemental retirement accounts since, after age 65, withdrawals for non-medical expenses are allowed without penalty (though they’ll be taxed as ordinary income). 

Who should consider an FSA? 

FSAs work well for taxpayers who: 

• Don’t qualify for an HSA (e.g., because their plan isn’t an HDHP) 

• Prefer to reduce taxable income through pre-tax contributions 

• Can reliably estimate annual health care costs to use most or all of their contributions each year 

• Have access to an FSA through their employer 

  
  

FSAs are especially helpful for predictable expenses like prescriptions or routine specialist visits.

Qualified expenses:

Both HSAs and FSAs can pay for IRS-approved medical expenses, which include:

• Co-pays, deductibles, and coinsurance 

• Dental treatments 

• Vision care, including glasses and contacts 

• Prescription drugs 

  
  

Please remember, withdrawals for qualified expenses are tax-free!

Non-Qualified expenses:

HSAs: If you’re under age 65, non-qualified withdrawals are subject to income tax plus a 20% penalty. However, after age 65, non-qualified withdrawals are not subject to the penalty, but are still taxed as ordinary income. 

FSAs: Using funds for non-qualified expenses violates plan rules and may result in having to repay the plan or pay additional taxes.