Health Savings Accounts and FSAs

With education and custodial accounts covered, let's turn to health-related tax-advantaged accounts. NASAA's outline names HSAs specifically; Flexible Spending Accounts (FSAs) are not separately named, but understanding how they differ from an HSA's triple tax advantage helps cement the HSA rules that are tested.

Health Savings Accounts (HSAs)

An HSA is a tax-advantaged account available to an eligible individual: someone enrolled in a high-deductible health plan (HDHP) who has no disqualifying non-HDHP coverage, is not enrolled in Medicare, and is not claimed as another taxpayer's dependent. HSAs offer a triple tax advantage, a benefit not shared by the mainstream account types tested on the exam (401(k)s, Roth IRAs, 529 plans, FSAs).

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

None of the mainstream account types on the exam (401(k), Roth IRA, 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 (2026)

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: Any eligible individual 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 (penalty waived for distributions after disability or death)
• 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)
• Employee salary-reduction limit: $3,400 (2026) for healthcare FSAs (this is the cap on the employee's own pre-tax contribution; an employer may add its own contribution on top)
• Use-it-or-lose-it: Unused funds are generally forfeited at year-end
  • Employers may offer one of two relief options:
    • Grace period: up to 2.5 additional months to spend unused funds, OR
    • Carryover: Roll over up to $680 (2026) to the next year
  • Employers are not required to offer either option
• Not portable: The account is tied to the employer; leaving the job generally means losing access to the balance, though a qualifying employee may be able to elect COBRA continuation to keep it temporarily
• 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 has only two of the three. An FSA offers pre-tax contributions and tax-free qualified reimbursements, same as an HSA, but has no investment growth component since funds are held as cash only.
• 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 generally means losing access to the FSA balance (absent a COBRA election), but HSA funds always stay with the individual.

Can You Have Both?

Generally, having general-purpose FSA coverage makes you ineligible to contribute to an HSA (an existing HSA balance is unaffected and remains available). However, you can contribute to an HSA while also having a Limited Purpose FSA (LPFSA), which mainly covers dental and vision expenses (the standard exam example), or a post-deductible FSA.

What Should You Check on Exam Day?

• HSA's triple tax advantage: deductible contributions, tax-free growth, tax-free qualified withdrawals; requires an HDHP; no income limits; funds roll over indefinitely
• Non-qualified HSA withdrawals before 65 are taxed as ordinary income plus a 20% penalty; after 65, only ordinary income tax applies (no penalty, no RMDs)
• FSA gives pre-tax contributions and tax-free qualified reimbursements but no investment growth component, is employer-owned and generally not portable, and is use-it-or-lose-it (employer may offer a grace period or a limited carryover, not both)
• General-purpose FSA coverage generally blocks new HSA contributions (an existing HSA balance stays available), but a Limited Purpose FSA (mainly dental/vision) or a post-deductible FSA is compatible with HSA contributions