Health Savings Accounts and FSAs

With education and custodial accounts covered, let's turn to health-related tax-advantaged accounts. The exam focuses on the triple tax advantage of HSAs and how they compare to the more limited Flexible Spending Accounts (FSAs).

Health Savings Accounts (HSAs)

An HSA is a tax-advantaged account available to individuals enrolled in a high-deductible health plan (HDHP). HSAs are unique because they offer a benefit no other account type provides: a triple tax advantage.

The Triple Tax Advantage

1. Contributions are tax-deductible (or pre-tax if through payroll)
2. Earnings grow tax-free (interest, dividends, capital gains)
3. Qualified withdrawals for medical expenses are tax-free

No other account (not a 401(k), not a Roth IRA, not a 529 plan) provides tax benefits at all three stages.

Think of it this way: A 401(k) gives you a tax break going in but taxes you coming out. A Roth IRA taxes you going in but lets you withdraw tax-free. An HSA does both: tax-free going in, tax-free growing, and tax-free coming out (for medical expenses). That is the triple advantage.

Contribution Limits (2025)

Key HSA Features

• No "use it or lose it" rule: Funds roll over indefinitely from year to year
• Portable: The account stays with the individual regardless of employer changes
• Investable: HSA funds can be invested in stocks, bonds, and mutual funds (not just held as cash)
• No income limits: Anyone with an HDHP can contribute, regardless of income
• Owned by the individual: Unlike FSAs, the account holder owns the HSA

Non-Qualified Withdrawals

• Under 65: Ordinary income tax plus 20% penalty
• 65 and older: Ordinary income tax only (no penalty)

HSAs as Retirement Vehicles

After age 65, HSAs function similarly to a traditional IRA for non-medical withdrawals:

• Withdrawals for medical expenses remain completely tax-free
• Withdrawals for non-medical expenses are taxed as ordinary income (no penalty)
• There are no required minimum distributions (RMDs) from an HSA
• This makes HSAs a powerful supplemental retirement savings tool

Exam Tip: Gotchas

• The HSA penalty for non-qualified withdrawals before age 65 is 20% (not 10% like IRAs). After age 65, the penalty disappears entirely, and the account essentially becomes a traditional IRA for non-medical expenses.

Flexible Spending Accounts (FSAs)

FSAs are employer-sponsored accounts that allow employees to set aside pre-tax dollars for healthcare or dependent care expenses. They are far more limited than HSAs.

Key FSA Rules

• Pre-tax contributions: Reduces taxable income (like HSA contributions)
• Contribution limit: $3,300 (2025) for healthcare FSAs
• Use-it-or-lose-it: Unused funds are generally forfeited at year-end
  • Employers may offer one of two relief options:
    • Grace period: 2.5 additional months to spend unused funds, OR
    • Carryover: Roll over up to $660 (2025) to the next year
  • Employers are not required to offer either option
• Not portable: The account is tied to the employer; leave the job, lose the FSA
• No investment component: Funds are held as cash only
• No age restrictions: Available to any employee regardless of age or health plan type
• Employer-owned: The employer technically owns the FSA

HSA vs. FSA Comparison

Exam Tip: Gotchas

• HSA has a triple tax advantage; FSA only provides a tax break on contributions. The FSA has no tax-free growth and no tax-free withdrawals.
• HSA requires a high-deductible health plan (HDHP); FSA does not. The HDHP requirement is the main eligibility barrier for HSAs.
• HSAs are portable and individually owned; FSAs are employer-owned and not portable. Leaving a job means losing the FSA balance, but HSA funds stay with the individual.

Can You Have Both?

Generally, you cannot have both a general-purpose FSA and an HSA at the same time. However, you can pair an HSA with a Limited Purpose FSA (LPFSA), which is restricted to dental and vision expenses only.