Understanding the Benefits of HSAs and FSAs
Disclaimer: This article is for informational purposes only and does not constitute tax, legal or financial advice. Consult your plan administrator or a qualified professional to understand how HSAs and FSAs apply to your personal situation.
Millions of Americans use tax‑advantaged health accounts—Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)—to pay for medical expenses. Both types of accounts let you set aside pre‑tax dollars for qualified healthcare costs, but they have different rules, limits and advantages. Below, we break down the key benefits of each and explain how they can help you make the most of your healthcare dollars.
What Is a Flexible Spending Account (FSA)?
An FSA is an employer‑sponsored benefit that allows employees to set aside money from their paycheck before taxes to pay for qualifying medical expenses such as copayments, deductibles, prescriptions and over‑the‑counter drugs. FSAs reduce your taxable income because contributions are made on a pre‑tax basis, and both employees and employers can contribute to the account. Unlike other types of savings accounts, the entire amount you elect to contribute for the year is available up front, even if you haven’t fully contributed yet.
Key FSA benefits
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Tax savings. Money you put into an FSA is excluded from federal income, Social Security and Medicare taxes, lowering your taxable income
irs.gov.
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Up‑front access to funds. You can spend your full annual election from day one of the plan year.
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Use it or lose it, with limited carryover. FSAs generally have a “use‑it‑or‑lose‑it” rule—unused funds typically do not roll over. Some employers allow a grace period or carryover; the IRS notes that for FSAs permitting carryover, the maximum amount that can carry into 2025 is $660, up from $640 in 2024
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Annual contribution limit. The IRS recently announced that employees may contribute up to $3,300 through payroll deductions during the 2025 plan year
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Wide range of eligible expenses. FSA funds can pay for qualified medical expenses not covered by health plans—think copays, deductibles, prescription medications, medical supplies, dental work and vision care
irs.gov.
What Is a Health Savings Account (HSA)?
An HSA is a savings account you own that is paired with a high‑deductible health plan (HDHP). To be eligible, your health plan must have a minimum deductible of $1,650 for self‑only coverage or $3,300 for family coverage in 2025, and the plan’s out‑of‑pocket maximum cannot exceed $8,300 for individuals or $16,600 for family coverage. You, your employer or anyone else can contribute pre‑tax dollars to the account, and you can invest the funds to grow your healthcare savings over time.
Key HSA benefits
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Triple tax advantage. HSAs offer tax‑deductible contributions, tax‑free interest and investment growth, and tax‑free withdrawals for qualified medical expenses. That makes them one of the most tax‑advantaged accounts available.
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Higher contribution limits. For 2025, you can contribute up to $4,300 if you have self‑only coverage and $8,550 if you have family coverage. Individuals age 55 or older can make an additional $1,000 catch‑up contribution.
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Portability and rollover. The account belongs to you; if you change jobs, your HSA goes with you, and unused funds roll over from year to year with no expiration.
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Investment opportunities. Many HSA providers let you invest your balance in mutual funds or other investment vehicles, allowing your healthcare savings to compound over time.
- Broad use of funds. HSA funds can pay for a wide array of qualified expenses, including prescriptions, doctor visits, dental and vision care and certain over‑the‑counter items. Once you turn 65, you can even use HSA funds for non‑medical expenses without a penalty (ordinary income tax will apply).