There are two main types of tax-advantaged accounts associated with health care expenses:
- Flexible Spending Account (FSA)
- Health Savings Account (HSA)
Of these two types of accounts, FSAs have been around for longer, with HSAs only being introduced in 2004. Both accounts allow an individual (or family) to save money pre-tax to use for qualified medical expenses.
Qualified medical expenses include medical, dental, and vision expenses. Funds can also be used to purchase over-the-counter healthcare supplies such as medication, bandages, even things like sunscreen. Any qualified medical expenses for the account holder or their dependents can be reimbursed with the pre-tax dollars from the FSA.
There are multiple kinds of flexible spending accounts including medical and dependent care accounts. This post will focus on medical FSAs.
For 2025 and individual can contribute up to $3,300 into a health care FSA. Unless you experience a qualifying event, such as the birth of a child, contribution selections for FSAs must be made during open enrollment and cannot be modified throughout the year. FSA funds can be used for any qualified medical expenses for the account holder or their dependents.
Funds saved in a medical FSA must be used in the year in which they were contributed (with the exception of the rollover amount, up to $660 for 2025). If there are funds in excess of the rollover amount in a medical FSA at the end of the plan year, they are forfeit. Additionally, funds in an FSA are tied to the employer medical plan, so if you change employers mid-year, any remaining FSA funds are forfeit. However, this also means that if you change employers, you are eligible to contribute up to the contribution limit into an FSA at your new employer for the remainder of the year.
Health savings accounts, more commonly known as HSAs, are another type of tax-advantaged medical savings account. These accounts are specifically designed for individuals or families who have a qualified high deductible health plan (HDHP).
HSAs are commonly called triple tax advantaged. These advantages include:
- Contributions to the account are made pre-tax, which means that they reduce your taxable income, which will, in turn, reduce your tax bill.
- Money in an HSA can be invested in a Health Savings Brokerage Account (HSBA) and any investment growth is tax free.
- When money is distributed from the account it is not taxable if it is used to pay for qualified medical expenses.
For 2025, an individual can contribute up to $4,300 and a family can contribute up to $8,550 to their HSA. Additionally, individuals age 55 and older can contribute an additional $1,000 per year as catch-up. For those who have health insurance through employer group coverage, employers may contribute to their employees HSAs as well. However, it is important to keep in mind that employer contributions count toward the total contribution limit. Unlike contribution selections for an FSA, HSA contribution selections can be made at any time from open enrollment to until the tax filing deadline. That means for 2025, you have until April 15, 2026 to contribute funds to an HSA.
HSA funds can be used to pay for qualified medical expenses directly or HSA funds can reimburse the account holder for qualified medical expenses of the account holder, their spouse, and their dependents.
Unlike an FSA, the funds in an HSA do not expire after one year. Additionally, your HSA is yours for life, so if you have medical insurance through an employer group plan and you change employers, your HSA goes with you.
The fact that the funds stay with the individual is the real power of the HSA. Distributions from an HSA can be made at any time, not just within the tax year in which they are incurred. Therefore, to maximize the benefits of the HSA you can take the following steps:
- Contribute funds in the HSA up to the annual contribution limit
- Invest funds in excess of the investment threshold (usually $1,000 – $2,000)
- Pay qualified medical expenses using out-of-pocket funds
- Maintain receipts for qualified medical expenses paid with out-of-pocket expenses
- Reimburse qualified medical expenses at a future date
This means you can contribute funds and invest them for tax-free growth. If you maintain records by saving receipts for qualified medical expenses, they can be reimbursed at a later date, after the funds have grown tax-free.
If HSA funds are used for non-qualified expenses, the distributions are subject to income tax and a 10% penalty. However, individuals over age 65 can take distributions from an HSA and use them for non-qualified expenses. In this case, the individual will pay income taxes on the distributions, but no 10% penalty will be assessed.
| FSA | HSA | |
| Reduce Taxable Income | Yes | Yes |
| Investment Opportunity | No | Yes |
| Annual Contribution Limit | $3,300 | Individual: $4,300 Family: $8,550 Catch-up (over 55): $1,000 |
| Contribution Timeline | During open enrollment | Between open enrollment and tax filing deadline |
| Account Beneficiaries | Account holder and dependents | Account holder, spouse, and dependents |
| Mid-year Employer Change | Funds forfeit | Funds stay with employee |
| Non-qualified Expense | N/A | Pay income tax and 10% penalty |
So, while contributing to either an FSA or an HSA reduces your taxable income, the HSA can offer additional advantages if the investment option is utilized. Given the choice between the two accounts, the HSA offers more advantages, but it is available only to individuals with a qualified high deductible health plan. Therefore, if your health insurance plan offers either option, they are a great way to reduce your taxable income, and therefore your tax bill.