What Is a Healthcare Spending Account? HSA, FSA & HRA

Healthcare spending accounts are tax-advantaged accounts you use to pay for medical costs with untaxed dollars. The three main types are the Health Savings Account (HSA), the Flexible Spending Account (FSA), and the Health Reimbursement Arrangement (HRA). They differ on who puts money in, who owns the account, whether the balance carries over, and what health coverage you need to qualify. Picking the right one, or knowing which one your employer is offering you, is worth real money at tax time.

Health Savings Account

An HSA is an account you open and own personally under federal law.¹ To contribute, you have to be enrolled in a High Deductible Health Plan (HDHP), have no other general health coverage, not be enrolled in Medicare, and not be claimed as a dependent on someone else’s return.

For 2026, a plan counts as an HDHP if it has a deductible of at least $1,700 for individual coverage or $3,400 for family coverage, and total out-of-pocket costs (excluding premiums) of no more than $8,500 individual or $17,000 family. Starting in 2026, bronze and catastrophic plans bought through a Health Insurance Marketplace also qualify as HDHPs even if they don’t hit those thresholds.² That change, made by the One, Big, Beautiful Bill Act, opens HSAs to a much larger group of Marketplace enrollees.

The reason HSAs get so much attention is the tax treatment. Contributions come out of taxable income, growth inside the account is tax-free, and withdrawals for qualified medical expenses are also tax-free.³ No other account in the tax code offers all three at once.

The balance rolls over every year with no expiration, and because you own the account, it stays with you if you change jobs, retire, or stop working. Most providers let you invest the balance in mutual funds once it clears a minimum, usually $1,000 to $2,000, and those investment gains stay tax-free as long as they eventually go to medical expenses. You report contributions and distributions on Form 8889 with your annual return.⁴ Keep receipts, because the IRS can ask for proof that a withdrawal covered a qualified expense.

Withdrawals for anything other than qualified medical expenses are taxed as income and hit with an additional 20% tax. The 20% surcharge disappears at age 65, at which point non-medical withdrawals are simply taxed as ordinary income.⁵

Flexible Spending Account

An FSA is an employer-sponsored account. You choose an annual contribution amount during open enrollment, and your employer redirects that money from your salary before income and payroll taxes are applied.⁶ The tax savings are immediate. The tradeoffs: the employer technically owns the account, you generally lose the balance when you leave the job, and unspent funds can disappear at the end of the plan year.

That last point is the “use it or lose it” rule, and it’s the reason FSA planning matters. Employers can soften it by offering one of two relief options, but never both: a grace period of up to 2.5 additional months to incur new expenses, or an annual carryover capped at $680 for 2026.⁷ Anything above the carryover cap, or anything unspent after the grace period, reverts to the employer. Estimate carefully when you elect your amount, because overshooting by a few hundred dollars means losing that money outright.

Because FSA funds are only released when you submit a claim for an eligible expense, non-qualified spending doesn’t carry the same penalty as with an HSA. If an FSA debit card is used on something ineligible, the plan administrator flags it and asks you to substantiate the expense or pay it back.

Limited-Purpose FSA

Having a regular FSA disqualifies you from contributing to an HSA. A limited-purpose FSA is the workaround: it reimburses only dental, vision, and preventive care, so it doesn’t interfere with HSA eligibility.³ If your employer offers one and you’re on an HDHP, you can run dental and vision through the limited-purpose FSA and keep the HSA for everything else.

h2>Health Reimbursement Arrangement

An HRA is funded entirely by the employer. You cannot put your own money in. The employer decides how much is available each year and which expenses qualify, within federal rules. When you leave the job, the funds typically stay with the company. HRAs come in three main forms.

Traditional HRA

A traditional HRA is paired with the employer’s group health plan. The employer reimburses you tax-free for out-of-pocket costs like deductibles and copays, up to a cap the employer sets. Whether unused amounts roll into the next year is also the employer’s call.

Individual Coverage HRA

An Individual Coverage HRA (ICHRA) reimburses you for premiums and expenses on individual health insurance you buy yourself, including Marketplace plans, private insurance, or Medicare.⁸ Employers of any size can offer them, and there’s no federal cap on the contribution. Reimbursement can vary by employee class (full-time, part-time, salaried, hourly, geography) and by age or dependent count, but the classes have to follow federal rules.

Qualified Small Employer HRA

A Qualified Small Employer HRA (QSEHRA) is for businesses with fewer than 50 full-time employees that don’t offer group health insurance.⁹ QSEHRAs have annual caps set by the IRS: for 2026, $6,450 for individual coverage and $13,100 for family coverage. To receive reimbursements, employees have to carry qualifying health coverage.

How the Three Compare

Who funds it: HSA, you (and optionally your employer); FSA, you through payroll; HRA, employer only.
Who owns it: HSA, you; FSA, employer; HRA, employer.
Portability: HSA stays with you; FSA and HRA generally do not.
Rollover: HSA rolls over indefinitely; FSA is use-it-or-lose-it with limited relief; HRA rollover is up to the employer.
Coverage required: HSA requires an HDHP; FSA and HRA do not, though QSEHRA reimbursement requires qualifying coverage.

What You Can Spend the Money On

All three accounts reimburse what the IRS calls qualified medical expenses. Publication 502 has the master list: doctor copays, prescription drugs, lab work, surgery, mental health services, durable medical equipment like crutches and hearing aids, and more.¹⁰ The expense has to be for treatment or prevention of a specific condition. General wellness spending like gym memberships doesn’t qualify.

Since 2020, over-the-counter medications and menstrual care products (tampons, pads, cups, and similar items) are qualified expenses without a prescription.¹¹

2026 Contribution Limits

The IRS resets these caps each year for inflation, and going over triggers taxes and penalties.

HSA. $4,400 for individual coverage and $8,750 for family coverage. If you’re 55 or older and not on Medicare, you can add a $1,000 catch-up contribution.² When both spouses are 55 or older on a family HDHP, each can make the $1,000 catch-up, but each spouse needs a separate HSA; the catch-up can’t be doubled into one account. These limits count both your contributions and any your employer makes: if your employer puts $1,500 in and you have individual coverage, your own contributions are capped at $2,900.

FSA. $3,400 per employee, with a carryover of up to $680 if the plan allows one.⁷ Spouses at separate employers can each contribute the full $3,400 to their own FSA, for up to $6,800 in combined pre-tax medical spending per household.

QSEHRA. $6,450 for individual coverage and $13,100 for family coverage.

HSAs and Medicare

The moment you enroll in any part of Medicare, your HSA contribution limit drops to zero for that month and every month after.¹ You can keep spending what’s already in the account, but no new money can go in.

There’s a trap here. When you enroll in Medicare after age 65, Part A coverage is retroactive for up to six months (never before your 65th birthday). Any HSA contributions you made during that retroactive window become excess contributions and are subject to excise tax unless you pull them back out. If you plan to keep contributing past 65, stop contributions at least six months before you intend to enroll. Claiming Social Security triggers automatic enrollment in Medicare Part A, so Social Security and continued HSA contributions can’t coexist.

Your existing HSA balance is still useful after enrollment. You can pay Medicare Part B, Part D, and Medicare Advantage premiums tax-free from the account, along with deductibles and copays. Medigap (Medicare Supplement) premiums are not a qualified HSA expense.

1
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
2
Internal Revenue Service. Notice 2026-5 – Expanded Availability of Health Savings Accounts Under the OBBBA
3
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
4
Internal Revenue Service. About Form 8889, Health Savings Accounts (HSAs)
5
Internal Revenue Service. Instructions for Form 8889 (2025)
6
Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans
7
Internal Revenue Service. Revenue Procedure 2025-32 – Inflation Adjusted Items for 2026
8
HealthCare.gov. Individual Coverage Health Reimbursement Arrangements (HRAs)
9
HealthCare.gov. Health Reimbursement Arrangements (HRAs) for Small Employers
10
Internal Revenue Service. Publication 502 (2025), Medical and Dental Expenses
11
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act