Tax-Free Medical Savings: What You Need to Know

Dietrich Easter

Health Savings Accounts (HSA) and Flexible Spending Arrangements (FSA) are tax-free medical savings accounts. You use them to pay for certain qualified medical expenses. They’re regulated by the IRS, and learning what you need to know directly from them may take heroic patience... possibly an emesis basin.

We’ve waded through the noise and translated the most important points for you.  

The HSA has much more information to go through, so we’ll present it first. Then we’ll look at  FSAs, and finally, we’ll compare the two to see which one is right for you.

There is a lot to cover, but here’s what you need to know.


Key Differences Between HSA and FSA:

Both plans offer major benefits. Both are a gamble in the short term but for different reasons. These plans both offer tax-free medical payments for eligible expenses. An HSA, however, has the potential to grow a large, tax-free retirement fund.

An HSA is a tax-sheltered, rollover account that accrues interest over time. Not only can you use it to pay for medical bills and supplies, but you can also utilize it for retirement. It is privately owned and contributions can be made by the individual, family, or an employer. 

People often describe HSAs as triple tax-advantaged. 

  • Contributions are tax-free
  • Interest Earned is tax-free
  • Withdrawals for qualified medical expenses are tax-free


The HSA is a gamble because you can't access your tax-free money until you meet your insurance deductible. This type of account requires a High Deductible Health Plan (HDHP), which we’ll explain later.

An FSA is a use-it-or-lose-it medical expense account. Even if money remains at the end of the year, the account doesn’t roll over. That’s the gamble with an FSA. You need to be very careful how much you contribute or your money will be gone.

Your employer owns your FSA, but the money is yours to spend on qualified medical expenses. It's your employer who makes contributions, typically from a paycheck deduction. The deduction is set during open enrollment and needs careful estimation so you don't lose it.


How HSA’s Work

An HSA is essentially a tax-exempt, private bank or investment account. It is set up by an individual on behalf of that individual or for a family. It’s also owned by that individual, unlike an FSA. You make periodic contributions and the funds can be withdrawn at any time, tax-free. But you have to use those funds for qualified medical expenses. The owner can also ask for reimbursement at a later date.

You can open an HSA with any company approved by the IRS, such as IRA trustees, Archer Medical Savings Accounts (MSA), banks, insurance companies, and even brokerages.

You choose who to invest with and the terms are not standard. You can shop for the most favorable investment vehicle for your situation.

Investment options include high-interest savings accounts, money market funds, bonds, and even stocks. Your specific circumstances will dictate your best options. 

You can withdraw from your HSA at any time, but it has to go toward qualified medical expenses. Otherwise, anyone under 65 will face tax liability on the withdrawal and a 20 percent penalty. 

Anyone older than 65 can withdraw their funds at any time without penalty and for any reason. Unless the withdrawal is for qualified medical expenses it's no longer tax-exempt. 

People enrolled in Medicare aren't eligible for an HSA. At age 65 you can no longer contribute, but the money continues to accrue interest or gains and is available. 

At the time of the account holder’s death, the HSA becomes the HSA of the spouse. If the beneficiary isn't a spouse the HSA becomes inactive. The market value of the account is no longer tax-exempt.

Eligible individuals contribute monthly to an HSA. Employers can also contribute. Individuals must balance their contributions with the employer to avoid excess contributions. Anything over the contribution limit is not tax deductible. When you file taxes you must also file Form 8889 for any contributions made during the year. That's unlike an FSA, which has no reporting requirement.

In 2024 the limit for contributions to an HSA is $4,150 for individuals and $8,300 for families. Account holders, employers, and family members can all contribute. However excess contributions are liable to taxes.

Anyone over 55 at the end of the tax year can increase their contribution limit by $1,000. For example, an individual over 55 can contribute $5,150 per year, as opposed to the $4,150 limit for those under 55.

You can transfer your HSA between jobs and it remains active, regardless of the calendar year. Your contributions can add up over the years tax-free and accrue interest or gains.  


Who is eligible for an HSA?

To be eligible for an HSA:

  • You MUST have high-deductible health plan (HDHP) coverage.
  • You CAN NOT have any other health coverage except for liabilities incurred under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of property, a specific disease or illness, a fixed amount per day (or other period) of hospitalization, accidents, disability, dental care, vision care, long-term care, telehealth, and other remote care

  • You are NOT enrolled in Medicare

  • You CAN NOT be claimed as a dependant on someone else’s taxes
  • Some veterans covered under a VA service-connected disability may qualify


Your spouse may have non-HDHP health coverage as long as you are not covered. If both spouses choose to use an HSA then each must open one separately. There is no allowance for a joint HSA.

To qualify for an HSA you MUST be covered by a high-deductible health plan (HDHP). 


What is an HDHP?

A High Deductible Health Plan (HDHP) is an insurance plan with a low monthly premium and a high deductible. HDHP's only provide coverage once you reach the deductible limit. In 2024 the minimum deductible is $1600 for individuals and $3200 for families.

The upper limit of out-of-pocket expenses is $8,050 for individuals and $16,100 for families.

What that means is that you will pay out-of-pocket for medical care up to the minimum deductible limit. After that, the insurance company pays a part of your medical costs. You can expect the insurance company to pay the majority of expenses, 80% for example. When you reach the upper limit for expenses insurance takes over entirely. 

Out-of-pocket expenses can include deductibles, co-payments and other expenses, but NOT premiums.


Who benefits from a high deductible health plan?  

Healthy people who don’t expect to spend much on medical expenses can benefit from an HDHP. If they don't need it their contributions accrue tax-free interest or gains.

The trade-off of this strategy is if unforeseen events occur such as an accident or a sudden illness. Paying high out-of-pocket expenses up to the deductible can cause big problems.

Wealthy individuals who don't have difficulty with out-of-pocket expenses can also benefit.


How do you use an HSA? 

Once enrolled, you pay your medical expenses until you reach your annual deductible. Once you reach the limit you can use a debit card, check, or bank transfer. Or you pay out-of-pocket and ask your trustee to send you reimbursement distributions.

Remember, you have to keep accurate records and receipts for reimbursement. If you withdraw for anything not covered you'll face taxes and a 20 percent penalty.



How FSA’s Work

A Flexible Spending Arrangement is an account funded by withdrawals from your paycheck. The funds are tax-free and excluded from your gross income. Employers can also contribute. Unlike an HSA, there are no reporting requirements on your tax return. Contribution limits in 2024 are $3200 for individuals. If the plan allows a spouse, that can increase to $6400 for a household.

An FSA is established by your employer and self-employed people aren’t eligible. Employer contributions are tax-free unless your employer contributes to a long-term insurance plan. This has to be reported as income.

You determine your contribution open enrollment. These should be estimated as accurately as possible. Leftover contributions are generally “forfeited” at the end of the year. IRS Publication 969 is quoted as calling an FSA a “use-it-or-lose-it” plan. There is a possible grace period of 2.5 months for any expenses incurred past the end of the year. Or there is a $570 carryover you can use the next year, but not both. Employers are forbidden from refunding your money if it isn’t used.


What is a Qualified Medical Expense?

Both plans require paying for qualified medical expenses to be tax-free. 

Generally speaking, this applies to any diagnostics or treatments normally considered medical expenses. Doctors, surgeries, dental treatment, manysupplies, equipment, and devices are all covered. There are also some treatments you may not have considered. These treatments have to be primarily to “alleviate or prevent a physical or mental disability or illness.”

Neither plan allows using tax-free funds to pay for insurance premiums.

The list of qualified treatments is here and most are what you would expect as medical treatment. Some unexpected points are acupuncture, Braille books, chiropractors, Christian Science Practitioners, disabled dependent care expenses, service animals, lead-based paint removal, and even legal fees for the authorization of mental health treatment. Home improvements for medical purposes, called capital expenses, can qualify as well. Some vehicle modification expenses also qualify.

Many medical supplies are covered under these plans. All you need to do is go to and order what you need. Submit your receipts for reimbusement and you’re good to go, TAX-FREE.

Medical expenses that are beneficial but not meant to alleviate aren't covered. Expenses such as vitamins and vacations are not covered. Substances banned by Federal law, such as marijuana, aren't covered. Babysitting, funeral expenses, future health care, and cosmetic surgery are also on the list of ineligible treatments.



Which Plan is Right For You?

Both HSA and the FSA are gambles in one sense, and both have major advantages. FSA’s provide reimbursement for covered expenses and don’t require a High Deductible Health Plan. For those who are more sensitive to high cash payments at the time of service, an FSA may be your best choice. 

Be careful when choosing how much you contribute, though. You will forfeit unused funds at the end of the year.

If you don’t expect many medical expenses an HSA has the potential to grow a sizeable retirement fund. You own it and you can control it.

After all that, though, only you can decide what's best for you and your family.

If tax-free medical supplies are something you’re looking for check out ourstore. We have tons of bulk items. Bandages, tape, PPE, equipment… we’ve got you covered. Submit your receipts and save big on what you need most.