By Emilia Vengor September 18, 2025
Providing Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) provides employees with a smart means of controlling healthcare expenses with tax advantages. The accounts can be used to pay for medical bills, from checkups to medication, and can enhance financial health. Offering HSA and FSA plans demonstrates your dedication to employees’ health and may enhance your benefit package.
How a Health Savings Account Works
A health savings account (HSA) is an intelligent means of saving money for healthcare costs while enjoying tax advantages. You can use it to pay for a lot of medical expenses, ranging from visits to the doctor to insurance for long-term care.
The funds you deposit into an HSA are exempt from taxes, so you don’t have to pay federal income tax on them. Employers or relatives can contribute money to your account as well, which are tax-exempt as well.
Your HSA money can earn interest or be invested, and you don’t pay taxes on the interest until you take it out. If you use the money for medical expenses, you pay no taxes at all. But if you use it for other reasons, you might owe fees and taxes.
You are able to take out your money at any time. Even when you retire or switch jobs, your HSA money is yours to keep. They don’t go away or vanish after a while. HSAs are also an excellent retirement savings option. They assist you in saving money that is tax-free to use for healthcare expenses, making it less stressful for you to pay bills with less annual tax.
Important Things to Know About HSAs
Health Savings Accounts (HSAs) come with a few downsides to keep in mind. First, not everyone is eligible to open one—you must be enrolled in a High Deductible Health Plan (HDHP), which often means higher out-of-pocket costs before insurance starts covering expenses. This leads to other challenges like high upfront costs.
With an HDHP, you will have to spend more on medical services out of your own pocket at the start of the year, which may strain your finances. Last, although HSAs permit greater contributions compared to FSAs, there remains a yearly cap on the amount you can contribute, so you cannot save unlimited amounts for future medical expenses.
HSA Contributions
HSA contributions don’t have to be spent in the same tax year—they can stay in your account and roll over to the next year. This means your savings can grow over time. HSAs are also portable, so if an employee changes jobs, they can take their HSA with them.
Tip: if the account owner dies, the HSA can be rolled over tax-free to a spouse. If the beneficiary is not the spouse, the account no longer qualifies as an HSA. Then the beneficiary will have to pay taxes on the value of the account.
Withdrawals Authorized Under an HSA
When making HSA payments, it’s useful to understand how withdrawals function. Money withdrawn from an HSA is not taxed if spent on IRS-qualified medical expenses. The HSA administrator will issue a Form 1099-SA to report distributions.
Qualified medical expenses may encompass such things as deductibles, dental services, eye care, prescription drugs, copays, and some treatments for mental illness. It’s important to note that insurance premiums usually don’t count as qualified expenses.
Exceptions include Medicare or other health coverage if you’re 65 or older, coverage during unemployment, and certain long-term care insurance (subject to yearly limits). Premiums for Medicare supplemental or Medigap policies are not considered qualified medical expenses. Providing HSA contributions offers staff with a versatile means of financing these medical expenses with tax advantages.
How a Flexible Spending Account Operates
A Flexible Spending Account (FSA) is quite similar to a Health Savings Account (HSA) but differs in some significant ways. Firstly, the FSA belongs to the employer, not the worker, and independently employed individuals aren’t qualified to create one.
One of the best things about an FSA is that it can be established as a Dependent Care FSA (DCFSA), which allows you to spend the money on childcare costs. A lot of employers also provide a specific medical FSA to cover medical expenses.
Like a HSA, you can contribute to an FSA from your salary before taxes are removed. If you use it for qualified medical expenses, chances are that you won’t need to pay taxes when you withdraw the funds. It’s a useful means of keeping money set aside and budgeting for healthcare expenses throughout the year.
Important Things to Know About FSAs
Unlike with an HSA, when you opt to establish an FSA, you must inform your company precisely how much money you wish to have subtracted from your monthly pay for the entire year. Once you make the decision, it’s generally set—you can’t easily switch it out later on. In case you opt not to enroll in this period of open enrollment with your firm, you’ll probably have to wait until next year’s sign-up to become a member.
Also, the funds you contribute to an FSA have to be spent in the same tax year. There is a small grace period under some plans, but if you don’t expend all the money before the deadline, you may lose the remaining funds.
You don’t need a health insurance policy to set up an FSA, but you should be aware that an FSA is not a substitute for insurance. You can’t even use it to pay your insurance bills.
How to Use Your FSA as a Loan
You can spend your FSA as a short-term loan for anticipated medical care. For instance, if you plan something early in the year, you can use your FSA to cover them even if you haven’t had a chance yet to contribute the full amount—your employer pre-funds the qualified costs.
Some FSAs allow you to take out your entire yearly contribution for yourself immediately, but for dependents, you can only spend what is already in the account. Employers must reimburse any eligible expense at once, regardless of when it occurs during the year.
That way, you can budget big medical procedures such as dental care, braces, or fertility treatments at the beginning of the year and then reimburse the FSA on a gradual basis with pretax dollars throughout the year. The advantage is that you’re borrowing money at a greater-than-zero rate of interest, since you pay it back with untaxed funds.
For instance, if you want to take $1,000 , an individual who pays state, federal, and FICA taxes may have to make more than $1,600 in gross income. The use of the FSA cuts that cost, so it’s an intelligent strategy for financing anticipated medical bills.
What Happens to Your FSA if You Quit
When providing FSA payments, it is best that employers understand what they do in case the employee leaves the company. If the employee intends to quit or leave the company for another job, it is best that they spend their FSA before they go. They do not have to repay any amount they have already spent from their account, even if they have not put in the total year’s amount as yet.
For instance, if an individual makes use of his or her FSA early in the year and then departs, he or she effectively receives complete value for health costs without paying an additional amount. By providing FSA payments, you provide workers with a flexible means of coping with healthcare expenses, and also enable them to get the most out of the benefits prior to any change of jobs.
Flexible Savings Account (FSA) vs Health Savings Account (HSA)
When preparing for healthcare costs, it is possible to get a Flexible Savings Account (FSA) confused with a Health Savings Account (HSA) because both give tax benefits. Nonetheless, both function differently and provide different benefits.
FSAs are established through employers, and your employer and you can both contribute pre-tax dollars to the account. But the contribution levels are reduced, and any money you don’t use generally expires at year’s end. And if you switch jobs, you typically forfeit what’s left in the account.
HSAs, by contrast, are more versatile. They’re for people with high-deductible health plans and permit increased contributions annually. One of the best things about HSAs is that unused money carries over from year to year, so you won’t lose money if you change jobs or don’t need it immediately. You can also invest the funds in mutual funds and other instruments to make money grow over time.
By offering HSA payments as part of your benefits, you’re helping employees take control of their healthcare expenses while saving on taxes. It’s a simple way to provide extra support for medical costs, giving employees benefits of peace of mind and financial flexibility.
An HSA encourages smart saving habits and helps them to plan for the future, making it an attractive option for anyone looking to manage their healthcare spending. Adding HSA contributions to your benefits package demonstrates concern for their health and provides them with resources to save for what is most important to them.
Selecting FSA and HSA: What is Ideal for your Business?
When deciding between an FSA and an HSA for your company, it ultimately comes down to what suits the needs of your employees and what your company’s objectives are. If your group typically has recurring healthcare costs, an FSA can be a good fit because it can help pay for those short-term expenses.
But if they have high-deductible plans and need to save for future health-related costs, an HSA may prove to be more useful because it can help them accumulate savings and even invest them. It’s also worthwhile to consider eligibility. HSAs are limited to employees with a high-deductible health plan, whereas FSAs can be provided to a broader class of workers.
With regard to how much they can contribute, HSAs tend to permit greater contributions, meaning they save more in the long run. Additionally, HSAs are portable, and workers can carry them when they switch employers, whereas FSAs are employer-specific and may lapse if unused.
Both accounts are tax-advantaged, but HSAs take it one step further by allowing workers to invest their money tax-free and let it grow. Conversely, FSAs have a “use it or lose it” provision, with unused money not being carried forward, whereas HSA funds are carried over from year to year.
Ultimately, choosing between an FSA and an HSA is based on what is most beneficial for your employees’ health conditions and financial strategy. An HSA provides more freedom and future savings, and an FSA can assist with paying for day-to-day medical costs. The right choice indicates you care about their health and their future.
Top Common Questions Regarding Withdrawing and Spending FSA and HSA Money
Can I Withdraw Cash From an HSA or FSA?
With an FSA, you can spend the money only on qualified medical expenses that have been approved by the IRS. If you spend it on something else, you’ll have to repay it or incur penalties. With an HSA, though, there is a bit more flexibility in payment—you can withdraw the money at any time. But if you use it for non-medical purposes prior to age 65, you’ll pay income taxes and a penalty.
What Happens to Unused FSA Money?
If you don’t spend the money in your FSA by the plan year’s end (or during a grace period, if your employer provides one), the remaining money is lost. Also, if you quit your job, any unused balance usually goes back to your employer.
What Happens If I Use My FSA Incorrectly?
Not all expenses are FSA-reimbursed. If you happen to spend on something that is not qualified, you will have to refund the money. Not doing so may cause your FSA to be suspended until the problem is fixed. Always double-check what is reimbursed to avoid issues.
Can I Open a Health Savings Account (HSA) If I'm Self-Employed?
Yes, you may open an HSA if you have a high-deductible health plan. Self-employed individuals may select HSAs from banks or brokerages. It is wise to shop around and compare options to select an HSA that meets your requirements, fees, and investment possibilities.
Do I Have to Use All of the Money in My HSA Every Year?
No, in contrast to an FSA, your HSA funds carry forward every year. You can let them accumulate, spend them on future healthcare costs, or even invest them to save for retirement.
Can I Pay My Insurance Premiums with My HSA Funds?
In general, HSA funds are not available for payment of regular health insurance premiums. They can be used to cover doctor visits, prescriptions, and other eligible medical expenses. Exceptions are Medicare premiums, COBRA coverage, or certain long-term care insurance premiums in IRS limits.
How Is FSA Deducted From My Paycheck?
You get to decide how much of a contribution you wish to make to your FSA for the year. Your employer divides that sum into your paychecks and automatically deducts it, depositing the funds into your FSA each time you are paid.
Conclusion
Providing HSA and FSA payments gives employees the power to manage their healthcare costs while reaping beneficial tax savings. These accounts offer flexibility, security, and long-term savings.
By adding HSAs and FSAs to your employee benefits, not only are you caring for your team’s health, but you’re also making your workplace more attractive to existing and potential employees.
FAQs
How is an HSA different from an FSA?
An HSA is for those employees who have high-deductible health plans and have the feature that funds will roll over and accumulate, whereas an FSA is owned by the employer and usually needs to be spent within the plan year.
Are HSA or FSA funds available for use on any medical expense?
Funds can be used only on IRS-certified medical expenses; their use for other purposes may subject one to taxes and penalties.
What does become of unused FSA money?
Unused FSA dollars typically expire at the end of the year or grace period, but HSA money carries over forever.
What if I change jobs? Can I retain my HSA?
Yes, HSAs are portable and stay with the employee even after they leave employment.
Are contributions to the HSA and FSA tax-deductible?
Yes, contributions to both plans lower taxable income, providing significant tax savings.