What Is a Health Care Spending Account? HSA, FSA & HRA

A health care spending account is a tax-advantaged account you use to pay for medical expenses with money that has not been taxed. Three types exist under federal law: the Health Savings Account (HSA), the Flexible Spending Account (FSA), and the Health Reimbursement Arrangement (HRA). They differ in who can open one, who puts money in, and what happens to a balance you don’t spend by year-end. Picking the right one — or the right combination — can save you thousands in taxes and make out-of-pocket medical costs easier to budget.

The Three Account Types at a Glance

Each account sits under a different section of the tax code, and that legal home explains most of the practical differences.

An HSA is a trust or custodial account in your own name.¹ Because you personally own it, the balance follows you when you change jobs, retire, or drop your insurance. You and your employer can both contribute, and you can invest the balance the way you would a retirement account. The catch: you have to be enrolled in a qualifying High Deductible Health Plan (HDHP).

An FSA is part of an employer’s cafeteria plan.² You redirect a portion of your pre-tax salary into a reimbursement account. Any health plan works, but your employer has to offer the benefit. Self-employed people and business partners generally cannot participate, because the law limits cafeteria plans to employees.

An HRA is funded entirely by your employer.³ You cannot add your own money. Your employer sets a dollar limit and reimburses you for qualifying expenses up to that amount, under the tax rules for employer-provided health plans.⁴ Because the employer designs the plan, the specifics — what qualifies, whether unused funds carry over — vary from employer to employer.

Health Savings Account (HSA)

The HSA is the most tax-favored account in the entire code. Contributions are deductible (or pre-tax if run through payroll), the balance grows tax-free, and withdrawals for qualified medical expenses come out tax-free. No other account gives you all three at once. After age 65, you can pull money out for anything at all without the 20% penalty; you just pay ordinary income tax, the way you would on a traditional IRA withdrawal.¹

To contribute, you need an HDHP that meets IRS thresholds. For 2026, the plan’s annual deductible must be at least $1,700 for self-only coverage or $3,400 for family coverage, and total out-of-pocket costs cannot exceed $8,500 for self-only or $17,000 for family coverage (premiums don’t count toward that cap).⁵ You also cannot be enrolled in Medicare or claimed as someone else’s dependent.⁶

For 2026, the contribution limit is $4,400 for self-only coverage and $8,750 for family coverage, plus a $1,000 catch-up if you are 55 or older. Those limits cover all contributions combined — yours and your employer’s.⁷

Two timing rules are worth knowing. If you enroll in Medicare mid-year, your contribution limit is prorated to the months before Medicare took effect. And under the “last-month rule,” if you are HSA-eligible on December 1, the IRS treats you as eligible for the whole year — but you have to stay eligible through a 13-month testing period ending December 31 of the following year, or the extra contributions get added back to your income plus a 10% additional tax.⁶

One state-level wrinkle: California and New Jersey do not recognize the federal HSA deduction. Residents of those states owe state income tax on HSA contributions and earnings.

The best feature of an HSA might be what doesn’t happen to it. Balances roll over indefinitely. There is no deadline to spend the money, no cap on how large the account can grow, and nothing forces a distribution. That makes an HSA a serious long-term savings vehicle, not just a way to pay this year’s copays.

Flexible Spending Account (FSA)

An FSA works through payroll. You elect an annual amount during open enrollment, your employer deducts it in equal installments from your pre-tax pay, and you draw against the account for medical expenses. The savings show up as federal income tax, Social Security tax, and Medicare tax you never paid on that portion of your salary.

For 2026, an employee can put up to $3,400 into a health FSA. Balances cannot be invested. You do not need any particular kind of insurance, and you can enroll during your employer’s annual open enrollment or after a qualifying life event like marriage, a birth, or loss of other coverage.²

The trade-off is the use-it-or-lose-it rule. Money left in the account at the end of the plan year is generally forfeited. Your employer can offer one of two relief options, but not both:⁶

A grace period of up to 2½ extra months after the plan year ends, during which you can incur and pay for qualifying expenses using leftover funds.
A carryover of up to $680 (for 2026) into the next plan year. Anything above that amount is still forfeited.

If your employer offers neither option, whatever sits in the account on the last day of the plan year is gone. That makes the annual election a real forecasting exercise. Estimate on the low side if you’re uncertain.

Health Reimbursement Arrangement (HRA)

An HRA sits on the employer’s side of the ledger. Your employer sets an annual reimbursement limit, you submit receipts for qualifying expenses, and reimbursements come to you tax-free.⁸ There is no federal contribution cap on a traditional HRA; the employer picks the number. Whether unused funds roll into next year is also up to the employer. Check the plan document or ask HR.

Two newer HRA variants extend the model to smaller employers and to workers who buy their own coverage:

A Qualified Small Employer HRA (QSEHRA) is available to businesses with fewer than 50 full-time employees that don’t offer a group health plan. The employer reimburses employees for individual insurance premiums and medical expenses up to annual limits — $6,450 for self-only and $13,100 for family coverage in 2026. Employees must carry qualifying coverage.⁹
An Individual Coverage HRA (ICHRA) lets employers of any size reimburse employees for individual insurance premiums and medical expenses in place of a group plan. There is no cap on employer contributions, but employees have to be enrolled in a qualifying individual plan. Short-term plans, health care sharing ministries, and fixed-indemnity plans don’t count.

Comparing the Three Accounts

The differences that matter most in practice:

Who owns the account: HSA — you. FSA — your employer’s plan, tied to your job. HRA — your employer.
Who contributes: HSA — you and/or your employer. FSA — mainly you, sometimes with an employer match. HRA — employer only.
Insurance required: HSA — a qualifying HDHP. FSA — none. HRA — whatever your employer requires.
Investment growth: HSA — yes. FSA — no. HRA — no.
Rollover: HSA — unlimited, forever. FSA — nothing unless your employer offers a grace period or a carryover of up to $680. HRA — depends on the plan.
Portability when you leave your job: HSA — the whole balance goes with you. FSA — usually forfeited. HRA — stays with the employer.

What Counts as a Qualified Medical Expense

All three account types generally follow the same IRS definition of a qualified medical expense.³ The list is broad:

Deductibles, copayments, and coinsurance under your health plan
Prescriptions and insulin
Medical equipment like crutches, hearing aids, and blood glucose monitors
Vision care, including exams, glasses, contact lenses, and laser eye surgery
Dental care, including cleanings, fillings, and orthodontics (cosmetic dentistry doesn’t qualify)
Mental health and therapy, psychiatric care, and physical therapy
Medically necessary home modifications such as wheelchair ramps

Over-the-counter medications and menstrual care products qualify without a prescription. The CARES Act made that change permanent for expenses after December 31, 2019.¹⁰ Pain relievers, allergy medicine, and cold medicine are eligible. Vitamins and supplements taken for general wellness are not.

Health insurance premiums are generally not a qualified expense for an HSA, with limited exceptions: COBRA, coverage while you’re receiving unemployment, Medicare Parts A, B, D, and Medicare Advantage after age 65 (Medigap is excluded), and long-term care premiums up to age-based annual limits.⁶

Using HSA money for anything that isn’t a qualified expense before age 65 means paying income tax on the withdrawal plus a 20% additional tax.¹ The 20% penalty drops off after 65. For an FSA or HRA, improper use of funds can be treated as taxable income and can put the plan’s tax-favored status at risk.

Can You Have More Than One?

You can hold more than one type, but not in every combination. The rule that trips most people up: a general-purpose FSA or HRA that reimburses medical costs before you meet your deductible disqualifies you from contributing to an HSA.⁶

Three workarounds preserve HSA eligibility while giving you a second account:

A limited-purpose FSA or HRA reimburses only dental and vision expenses, leaving the HDHP to cover everything else.
A post-deductible HRA refuses to reimburse anything until you have met a minimum deductible.
A suspended HRA is paused for the coverage period, reimbursing nothing during that time.

Pairing an HSA with a limited-purpose FSA is a common maximization move: the HSA handles medical bills and builds long-term savings, while the FSA covers predictable dental and vision costs with pre-tax dollars.

What Happens When You Leave Your Job

Portability is where the three accounts diverge most sharply.

An HSA is fully yours. The full balance — contributions, employer matches, investment growth — leaves with you. You can keep spending it on qualified expenses even without HDHP coverage, though you can only make new contributions when you’re enrolled in an HDHP again.¹

An FSA is tied to your employment. Any balance left when you leave is usually forfeited. You can submit claims for expenses incurred before your termination date, but not for anything after. Some plans let you continue an FSA through COBRA, though you’ll pay the full amount plus a 2% administrative fee, and the pre-tax payroll benefit is gone.

An HRA stays with the employer. Some plans allow a window to submit claims for expenses incurred during employment, and some HRA types can be continued through COBRA, but the account itself doesn’t transfer to you.

If you have a choice among the three, the practical picture is this: an HSA gives you the strongest tax treatment, portability, and long-term flexibility, but only if you can live with an HDHP. An FSA saves you money on predictable annual expenses if you can estimate them accurately. An HRA is a benefit you take advantage of as your employer designs it. Many people end up using two of them together, and the coordination rules above are what make that possible.

1
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
2
Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans
3
Internal Revenue Service. Publication 502 – Medical and Dental Expenses
4
Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans
5
Internal Revenue Service (IRS). 2026 Inflation Adjusted Items for Health Savings Accounts
6
Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
7
Internal Revenue Service. Notice 2026-5 – HSA Contribution Limits and Guidance
8
Office of the Law Revision Counsel. 26 USC 106 – Contributions by Employer to Accident and Health Plans
9
HealthCare.gov. Health Reimbursement Arrangements for Small Employers
10
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act