Flex Spending and Health Savings Accounts

What are Flexible Spending Accounts and Health Savings Accounts?

Overview

Both Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) help you save money for qualified medical expenses using pre-tax dollars, which reduces your taxable income. However, they differ in who qualifies, how funds roll over, and who owns the account.

FSA (Flexible Spending Account)

How It Works

Set up through your employer’s benefits plan.
Funded with pre-tax money from your paycheck.
You can use the funds for qualified medical, dental, and vision expenses.

Key Features

Eligibility: Anyone with an employer that offers it. Not tied to specific insurance plans.

Ownership: The employer owns the account. If you leave your job, you usually lose unused funds.

Contribution Limit (2025): $3,200 per year (set by IRS).

Rollover Rules: Typically “use it or lose it.” Some plans allow either a small carryover ($640 max) or a 2½-month grace period.

Access to Funds: Full annual election amount available immediately at the start of the year.

✅ Pros

Immediate access to your total elected funds.
Reduces taxable income.
Great for predictable, recurring expenses (like prescriptions, co-pays, or childcare if using a dependent-care FSA).

⚠️ Cons

Lose unspent money unless your employer offers a grace period or carryover.
Not portable — if you change jobs, you forfeit unused funds.
Employer sets the plan rules, not you.

HSA (Health Savings Account)

How It Works

Only available to people with a High-Deductible Health Plan (HDHP).
Funded with pre-tax money from you or your employer.
Can be used for qualified medical expenses now or in the future (even in retirement).

Key Features

Eligibility: Must be enrolled in an HDHP and have no other disqualifying coverage (like Medicare).

Ownership: You own the account — it’s yours even if you change jobs or insurance.

Contribution Limit (2025): $4,300 individual / $8,550 family (+$1,000 catch-up if age 55+).

Rollover Rules: Money rolls over year to year — no expiration.

Access to Funds: Only what you’ve actually deposited is available.

Tax Advantages: Triple tax benefit — contributions, growth, and withdrawals (for qualified expenses) are tax-free.

✅ Pros

Triple tax advantage (tax-free contributions, growth, and withdrawals).
Portable — it stays with you for life.
Funds roll over indefinitely.
Can invest unused funds for long-term growth.
Can be used tax-free in retirement for medical expenses.

⚠️ Cons

Must be enrolled in a high-deductible plan.
You can only spend what’s in the account.
If used for non-medical expenses before age 65, withdrawals are taxed and penalized.
HDHPs can mean higher out-of-pocket costs until you meet your deductible.

Which Is Better?

It depends on your situation:

Choose an FSA if:
- You expect steady annual medical expenses.
- You want upfront access to the full year’s funds.
- Your employer doesn’t offer an HDHP.
Choose an HSA if:
- You have an HDHP and can afford higher deductibles.
- You want to save for long-term or retirement health costs.
- You value investment growth and account ownership.

At a Glance: Comparison Table

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