HSA vs. FSA: Health Savings Accounts and Flexible Spending Accounts Explained

What Are HSAs and FSAs?

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are tax-advantaged accounts designed to help you pay for qualified medical expenses. Both let you set aside pre-tax dollars — money not subject to federal income tax or payroll taxes — to cover costs like doctor visits, prescriptions, dental work, and vision care.

Despite that shared purpose, HSAs and FSAs work very differently. They have different eligibility requirements, different contribution limits, different rules about unspent funds, and different potential as long-term financial tools. This guide covers everything you need to know so you can decide which account fits your situation.

How a Health Savings Account (HSA) Works

An HSA is a personal savings account you own and control, but it requires enrollment in a High Deductible Health Plan (HDHP). You cannot open or contribute to an HSA with a traditional PPO, HMO, or other non-HDHP coverage. You also cannot be enrolled in Medicare, claimed as a dependent, or have disqualifying coverage such as a general-purpose FSA.

The defining feature of an HSA is its triple tax advantage — a benefit no other account in the U.S. tax code can match:

1. Tax-deductible contributions. Every dollar you contribute reduces your taxable income. Payroll contributions also avoid FICA taxes, saving an additional 7.65%.
2. Tax-free growth. Interest and investment gains inside the HSA are never taxed. Many providers let you invest in mutual funds and index funds once you reach a minimum cash threshold.
3. Tax-free withdrawals. Withdrawals for qualified medical expenses are completely tax-free — no income tax, no capital gains tax, no penalties.

Your employer may contribute to your HSA on your behalf. Employer contributions count toward your annual limit but are not taxable income. Critically, you own the account — if you change jobs, get laid off, or retire, the money goes with you. Unused funds roll over indefinitely.

How a Flexible Spending Account (FSA) Works

An FSA is an employer-sponsored benefit that lets you set aside pre-tax paycheck money for qualified medical expenses. Unlike an HSA, it does not require a high deductible health plan — you can use one with virtually any employer-sponsored insurance. However, you can only get an FSA through your employer.

A key operational difference is timing. Your full annual election is available on day one of the plan year. If you elect $3,300 and need $2,500 for dental work in January, you can use it immediately — your employer fronts the difference and recoups it through payroll deductions.

The trade-off is the use-it-or-lose-it rule: money left in your FSA at the end of the plan year is forfeited. However, many employers offer one of two relief provisions:

• Grace period: An extra 2.5 months after the plan year ends to spend remaining funds.
• Carryover: Up to $660 of unused funds can roll into the next plan year (2026 limit). Anything above $660 is forfeited.

Your employer can offer a grace period or a carryover, but not both — and neither is required.

Key Differences Between HSAs and FSAs

Both accounts offer pre-tax savings for medical expenses, but the differences are significant.

Eligibility. HSAs require a qualifying HDHP. FSAs work with any employer-sponsored plan.

Ownership. You own your HSA regardless of employment status. An FSA is employer-owned — leave your job and you typically lose the balance.

Portability. HSAs are fully portable across jobs, providers, and into retirement. FSAs are tied to your current employer.

Rollover. HSA balances roll over indefinitely. FSA funds are use-it-or-lose-it, with limited relief through a grace period or up to $660 carryover.

Investment. HSA funds can be invested in mutual funds, stocks, and bonds. FSA funds cannot be invested.

2026 contribution limits. HSA: $4,400 individual, $8,750 family, plus $1,000 catch-up at 55+. FSA: $3,300 per employee.

Tax treatment. Both offer pre-tax contributions and tax-free withdrawals for qualified expenses. Only the HSA adds tax-free investment growth.

Funds availability. FSA funds are fully available on day one of the plan year. HSA funds are only available as you contribute them.

HSA Contribution Limits and HDHP Requirements

To contribute to an HSA in 2026, your health plan must meet the IRS definition of a High Deductible Health Plan. These thresholds are adjusted annually for inflation.

2026 HDHP minimum deductible:

• Self-only coverage: $1,700
• Family coverage: $3,400

2026 HDHP maximum out-of-pocket:

• Self-only coverage: $8,500
• Family coverage: $17,000

2026 HSA contribution limits:

• Self-only coverage: $4,400
• Family coverage: $8,750
• Catch-up contribution (age 55+): additional $1,000

These limits include both your contributions and any employer contributions. If your employer puts $1,000 into your HSA, your personal limit is reduced by that amount. The $1,000 catch-up amount has not changed since HSAs were created in 2003. You have until April 15, 2027 to make contributions for the 2026 tax year.

FSA Contribution Limits and Rules

FSA limits are set by the IRS and adjusted annually. For 2026:

• Healthcare FSA: $3,300 per employee. If both spouses have employer FSA access, each can contribute $3,300 for a household total of $6,600.
• Dependent Care FSA: Up to $5,000 per household ($2,500 if married filing separately) for child care or elder care expenses. This is separate from the healthcare FSA.
• Limited-Purpose FSA: Available alongside an HSA, covering only dental and vision expenses. This preserves your HSA funds for other medical costs or long-term savings.
• Carryover amount: Up to $660 of unused funds (if your employer allows it). Anything above $660 is forfeited.

Unlike HSAs, there is no catch-up contribution for FSAs. The $3,300 limit applies regardless of age, and your election ends when your employment does.

What Can You Pay For?

Both HSAs and FSAs cover the same broad list of qualified medical expenses defined by IRS Publication 502.

Eligible expenses include:

• Doctor visits, specialist appointments, and urgent care
• Prescription medications and insulin
• Dental care — cleanings, fillings, crowns, braces, dentures
• Vision care — eye exams, glasses, contacts, LASIK
• Mental health services — therapy, counseling, psychiatric care
• Over-the-counter medications (no prescription required since the CARES Act of 2020)
• Menstrual care products, sunscreen (SPF 15+), and medical equipment

Ineligible expenses include:

• Cosmetic procedures (teeth whitening, elective plastic surgery, hair transplants)
• Gym memberships and fitness programs (unless prescribed for a specific condition)
• Health insurance premiums (with limited HSA exceptions like COBRA and long-term care)
• General-health vitamins, supplements, and toiletries

Using HSA funds for ineligible expenses triggers income tax plus a 20% penalty if you are under 65. For FSAs, ineligible claims are simply denied by the plan administrator.

HSA as a Retirement Tool

Because unused HSA funds roll over indefinitely and can be invested, an HSA can function as a supplemental retirement account alongside your 401(k) and IRA. The strategy: pay current medical bills out of pocket, save the receipts, and let your HSA balance grow through investment returns. You can reimburse yourself from your HSA years or decades later, completely tax-free.

Consider the math: contributing $4,400 per year starting at age 30 and investing in a diversified index fund earning 7% annually would grow to approximately $690,000 by age 65 — a significant pool of tax-free money for healthcare in retirement.

After age 65, the HSA becomes even more flexible. Withdrawals for qualified medical expenses remain tax-free, but you can also withdraw for any purpose — you simply owe income tax, just like a traditional IRA distribution. The 20% penalty disappears entirely at 65.

One important Medicare caveat: once you enroll in Medicare, you can no longer contribute to an HSA. However, you can still use existing funds for qualified expenses — including Medicare Part B, Part C, and Part D premiums, long-term care premiums, and out-of-pocket costs — all tax-free. Some workers delay Medicare enrollment while covered by an employer HDHP specifically to keep contributing.

Pros and Cons of HSAs

Advantages:

• Triple tax advantage: Tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified expenses.
• Unlimited rollover: Funds never expire and can accumulate over decades.
• Investment potential: Invest in stocks, bonds, and mutual funds for long-term compound growth.
• Full portability: The account stays with you through job changes, self-employment, and retirement.
• Retirement flexibility: After 65, use funds for any purpose (taxed as income) or for medical expenses (tax-free).

Disadvantages:

• Requires an HDHP: Higher out-of-pocket costs before insurance kicks in.
• Higher upfront costs: The high deductible can burden people with chronic conditions or frequent medical needs.
• Penalty for non-medical withdrawals: Income tax plus 20% penalty before age 65.
• Record-keeping: You should save receipts for all medical expenses in case of an IRS audit, especially for delayed reimbursements.

Pros and Cons of FSAs

Advantages:

• No HDHP requirement: Works with any employer-sponsored health plan, including low-deductible PPOs and HMOs.
• Immediate full balance: Your entire annual election is available on day one of the plan year.
• Pre-tax savings: Contributions reduce taxable income and avoid FICA taxes.
• Pairs with lower-deductible plans: Better for people who use healthcare frequently and want lower out-of-pocket exposure.
• Employer contributions possible: Some employers add free money to employee FSAs.

Disadvantages:

• Use-it-or-lose-it: Unspent funds are forfeited at year-end (minus any grace period or $660 carryover).
• Not portable: Leave your job and you generally lose the remaining balance.
• No investment option: Funds sit as cash with no opportunity for growth.
• Annual re-enrollment: You must actively re-enroll each year during open enrollment or lose access.
• Lower limit: At $3,300, the FSA cap is well below the HSA family limit of $8,750.

Which One Should You Choose?

The best account depends on your health plan, employment situation, and financial goals.

Choose an HSA if:

• You are enrolled in a qualifying HDHP
• You are generally healthy and a high deductible would not be a financial burden
• You want long-term, investable savings that roll over year after year
• You value portability across job changes
• You want a supplemental retirement fund for future healthcare costs

Choose an FSA if:

• You have a non-HDHP health plan and are not eligible for an HSA
• You have predictable annual medical expenses and can estimate your spending confidently
• You need immediate access to the full annual balance for a planned procedure
• You are comfortable spending most or all of the funds within the plan year

Consider both if: You have an HDHP and your employer offers a limited-purpose FSA for dental and vision. This combination maximizes tax savings while preserving your HSA for medical costs and long-term investing.

Job stability matters too. If you are considering changing jobs, an FSA is riskier because you forfeit unused funds when you leave. An HSA carries no such risk, making it the clear choice for people early in their careers who expect to change employers.

The Bottom Line

HSAs and FSAs are both valuable tools for reducing healthcare costs through tax savings. The difference comes down to flexibility, ownership, and time horizon.

An HSA is the more powerful account by virtually every measure — triple tax advantage, unlimited rollover, investment options, full portability, and retirement flexibility. But it requires an HDHP, meaning higher deductibles and more out-of-pocket exposure. If you are healthy and can afford to cover your deductible, an HSA is one of the best financial tools available.

An FSA is simpler and more immediate. It works with any employer health plan, gives you day-one access to your full election, and delivers real tax savings on predictable expenses. Its limitations — use-it-or-lose-it, no portability, no investment — make it better suited for short-term healthcare budgeting than long-term wealth building.

Whichever you choose, the most important step is to actually use one. Millions of eligible workers never open an HSA, and an estimated 70% of FSA participants leave money on the table each year. Every dollar you contribute saves you money in taxes — and that is money you keep for your health and your future.

Frequently Asked Questions

Can I have both an HSA and an FSA at the same time? Not a general-purpose FSA — that would disqualify you from HSA eligibility. However, you can pair an HSA with a limited-purpose FSA (dental and vision only) or a post-deductible FSA. Check with your employer to see which options are available.

What happens to my FSA if I leave my job? You generally forfeit the remaining balance. You can elect COBRA to continue submitting claims through the plan year, but you must pay the full contribution out of pocket. Most people find it easier to submit claims for expenses incurred before their last day.

Can I use my HSA for my spouse's or dependents' expenses? Yes. HSA funds can pay for qualified medical expenses for you, your spouse, and your tax dependents — even if they are not covered by your HDHP.

Is there a deadline to spend HSA funds? No. HSA funds roll over indefinitely and never expire. You can also reimburse yourself for past medical expenses at any time — there is no requirement to withdraw in the same year the expense was incurred.

What is the penalty for using HSA funds on non-medical expenses? Under age 65, you owe income tax plus a 20% penalty. After 65, the penalty is waived and you owe only income tax — the same treatment as a traditional IRA distribution.

Can I change my FSA contribution mid-year? Generally no. Your election is locked in for the plan year unless you experience a qualifying life event such as marriage, birth of a child, or loss of other coverage.