A medical spending account is a tax-advantaged account that helps you pay for healthcare costs like doctor visits, prescriptions, dental work, and vision care. There are several types, each with different rules about who funds them, how much you can contribute, and whether unused money carries over. The three most common are health savings accounts (HSAs), flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs).
How Medical Spending Accounts Save You Money
The core benefit of any medical spending account is tax savings. Money that goes into these accounts is either deducted from your paycheck before taxes are calculated or contributed by your employer on a tax-free basis. When you use the funds for qualifying healthcare expenses, you pay nothing in federal income tax on that money. Depending on the account type, you may also avoid Social Security and Medicare payroll taxes on contributions.
For someone in the 22% federal tax bracket, putting $2,000 into a medical spending account effectively saves $440 or more in taxes. The savings increase the more you contribute and the higher your tax bracket.
Health Savings Accounts (HSAs)
HSAs are the most flexible type of medical spending account. You own the account personally, you can invest the balance, and unused funds roll over indefinitely. There is no deadline to spend the money. If you leave your job, the HSA goes with you.
The catch is eligibility. You can only open and contribute to an HSA if you’re enrolled in a high-deductible health plan (HDHP). For 2025, that means your plan must have an annual deductible of at least $1,650 for individual coverage or $3,300 for family coverage. Your plan’s total out-of-pocket maximum can’t exceed $8,300 for an individual or $16,600 for a family.
In 2025, contribution limits are $4,300 for self-only coverage and $8,550 for family coverage. If you’re 55 or older, you can add an extra $1,000 per year. You, your employer, or even family members can contribute to your HSA, as long as the total stays within those limits.
HSAs as a Retirement Tool
One underappreciated feature of HSAs is how they work after age 65. Before that age, withdrawing money for non-medical expenses triggers a 20% penalty plus income taxes. After 65, the penalty disappears entirely. You still owe income taxes on non-medical withdrawals, but the account essentially functions like a traditional retirement account at that point. If you use the money for qualified medical expenses at any age, it comes out completely tax-free and penalty-free.
This makes the HSA uniquely powerful: contributions are tax-deductible going in, the balance can grow tax-free through investments, and withdrawals for medical costs are never taxed. No other account type offers that triple tax advantage.
Flexible Spending Arrangements (FSAs)
FSAs are employer-sponsored accounts you fund through pre-tax payroll deductions. Your employer may also contribute, but the account is tied to your job. If you leave, your employer keeps the remaining balance.
The biggest difference from an HSA is the “use it or lose it” rule. You generally must spend your FSA balance within the plan year or forfeit what’s left. Employers can soften this in one of two ways: offering a grace period of up to two and a half months into the next year to use remaining funds, or allowing a carryover of up to $680 into the following year. Your employer chooses one option or neither, not both.
FSAs do have one advantage over HSAs: you don’t need a high-deductible health plan to use one. Any employer that offers an FSA can make it available regardless of what health insurance you carry. This makes FSAs accessible to more workers. They’re a good fit if you have predictable annual medical expenses and can estimate what you’ll spend with reasonable accuracy.
Health Reimbursement Arrangements (HRAs)
HRAs work differently from HSAs and FSAs because only your employer puts money in. You cannot contribute your own funds. Your employer sets the amount and the rules for how reimbursements work.
Employers use HRAs in a few ways. Some pair them with a traditional group health plan to help employees cover copays, deductibles, and other out-of-pocket costs. Others offer what’s called an individual coverage HRA, which reimburses employees who buy their own health insurance on the open market instead of using a company plan. This second type has become more common since federal rules expanded the option.
The key limitation is ownership. An HRA belongs to your employer, not to you. If you leave the company, you typically lose access to whatever balance remains. The upside is that these accounts cost you nothing out of pocket, since the funding comes entirely from your employer.
What You Can Spend the Money On
All three account types cover a broad range of medical, dental, and vision expenses. The IRS defines what qualifies, and the list includes:
- Doctor and hospital visits: office copays, lab work, surgeries, and specialist appointments
- Dental care: cleanings, X-rays, fillings, braces, extractions, and dentures (but not teeth whitening)
- Vision care: eye exams, prescription glasses, contact lenses, and corrective eye surgery like LASIK
- Prescription medications: any drug prescribed by a doctor, plus insulin
- Mental health services: therapy, psychiatric care, and substance abuse treatment
One common point of confusion is over-the-counter medications. The IRS does not allow you to deduct the cost of non-prescription drugs as a medical expense. If your doctor recommends aspirin or an allergy medication you can buy without a prescription, that cost doesn’t qualify. You need an actual prescription for the expense to be eligible. (Note: rules for HSAs and FSAs on OTC items were temporarily expanded in recent years, so check your specific plan documents for current guidance.)
Which Account Type Fits Your Situation
If you’re enrolled in a high-deductible health plan and want long-term savings potential, an HSA is the strongest option. The money is yours permanently, it grows over time, and it offers unmatched tax benefits. This is especially valuable if you’re healthy now and want to build a healthcare fund for later in life.
If your employer doesn’t offer a high-deductible plan, or you prefer lower deductibles, an FSA lets you still save on taxes for predictable expenses. Just be conservative with your contribution amount. Estimate what you’ll actually spend on healthcare that year, since overfunding means losing money at year’s end (minus any carryover your plan allows).
If your employer offers an HRA, there’s no decision to make on funding. It’s free money from your employer, and you simply use it for eligible expenses as they come up. Some employers offer an HRA alongside an FSA or HSA, so you may be able to use more than one account type at the same time. The specific rules about combining accounts depend on the types involved and how your employer structures them, so it’s worth reviewing your benefits materials during open enrollment.