What a Medical Savings Account Is and Who Can Open One

A medical savings account is a tax-advantaged account you own and control to pay for medical expenses out of pocket. The money you put in is not taxed, and withdrawals for may have access to medical costs are not taxed either. You keep the account even if you change jobs or health insurance plans — it belongs to you, not your employer.

There are three types: a Health Savings Account (HSA), a Flexible Spending Account (FSA), and an Archer Medical Savings Account (Archer MSA). HSAs are the most common and have the fewest restrictions. FSAs are usually offered through an employer and have a "use it or lose it" rule — money left over at the end of the year is forfeited. Archer MSAs are rare and have strict income limits.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) — a specific type of health insurance with a lower premium but higher deductible. You cannot have other health coverage, Medicare, or be claimed as a dependent on someone else's taxes. FSAs do not require an HDHP; your employer simply offers one as a benefit.

Key Takeaways

  • An HSA requires enrollment in a high-deductible health plan and is opened through a bank, credit union, or financial institution, not through your health insurance company.
  • An FSA is offered by your employer during open enrollment or when you first become employed, and the money reverts to your employer if unused by December 31.
  • HSA contribution limits for 2024 are $4,150 for individual coverage and $8,300 for family coverage, set by the IRS each year.
  • You can use medical savings account funds to pay for deductibles, copays, prescriptions, dental work, vision care, and other may have access to medical expenses defined by the IRS.
  • If you open an HSA after the year begins, you can only contribute a prorated amount unless you meet the "testing period" exception.

Opening an HSA Through a Bank or Financial Institution

Once you have enrolled in an HDHP, you can open an HSA at any bank, credit union, or financial services company that offers them. Your health insurance company does not open the account for you — you choose the institution. Common providers include Fidelity, Lively, HealthEquity, Optum Bank, and most major banks.

Visit the website of the institution you choose and look for "HSA" or "Health Savings Account." You will need to provide your name, Social Security number, date of birth, and proof that you are enrolled in an HDHP. Most institutions accept a screenshot of your insurance card or a letter from your health plan showing your HDHP enrollment date. Some ask you to upload these documents during signup; others mail you a form to sign and return.

The account usually opens within one to five business days. Once it is open, you can begin depositing money immediately. You can fund it through payroll deduction (if your employer offers it), a direct transfer from your bank account, or a check mailed to the institution. Payroll deduction is the simplest because the money comes out before taxes are calculated, lowering your taxable income automatically.

Setting Up an FSA Through Your Employer

An FSA is offered by your employer, not opened independently. During your company's open enrollment period — usually in the fall for benefits starting January 1 — you will see FSA as an option alongside health insurance and other benefits. If you are newly hired, you typically have 30 to 60 days to enroll in an FSA.

When you enroll, you decide how much to contribute for the year. The IRS sets an annual limit; for 2024, it is $3,300. Your employer deducts this amount from your paycheck in equal installments throughout the year, before taxes. The money goes into an account managed by a third-party administrator — often the same company that handles your health insurance claims.

You receive a debit card or checkbook linked to the FSA account. You use it to pay for may have access to medical expenses at the point of sale — at the pharmacy, doctor's office, or medical supply store. Some FSAs require you to submit receipts to prove the expense was medical; others do not. Any money left unspent by December 31 is forfeited and returned to your employer. Some employers offer a "grace period" of up to 2.5 months into the next year to spend remaining funds, but this is optional.

Contribution Limits and Deadlines for the Current Year

HSA and FSA contribution limits are set by the IRS and change each year. For 2024, HSA limits are $4,150 for individual coverage and $8,300 for family coverage. FSA limits are $3,300 for all participants. These limits apply to the total you contribute across all accounts of the same type — you cannot open two HSAs and contribute to both.

If you open an HSA partway through the year, your contribution is prorated based on the number of months remaining. If you open one in July, you can contribute only for July through December — six months. However, if you meet the "testing period" exception, you can contribute the full annual amount. This exception applies if you are enrolled in an HDHP on December 1 of the current year and remain enrolled through May 31 of the following year.

For FSAs, you can only enroll during your employer's open enrollment window or within 30 to 60 days of hire. You cannot open an FSA mid-year unless you have a may have access to life event — marriage, birth of a child, loss of other health coverage, or significant change in employment. If you miss the enrollment window, you must wait until the next open enrollment period.

What Expenses You Can Pay From a Medical Savings Account

The IRS maintains a list of may have access to medical expenses. These include deductibles, copays, and coinsurance for health insurance; prescription medications; dental and vision care; mental health treatment; physical therapy; and medical equipment like crutches, wheelchairs, and blood glucose monitors. You can also pay for over-the-counter medications if you have a prescription from a doctor, and for certain vitamins and supplements if prescribed.

Expenses you cannot pay include cosmetic procedures, gym memberships, general wellness products, and most over-the-counter items without a prescription. If you are unsure whether an expense qualifies, the IRS publishes a full list on its website, and your account provider can also answer questions.

Keep receipts for all withdrawals. If you use an HSA and withdraw money for a non-may have access to expense, you owe income tax on that amount plus a 20 percent penalty. FSA withdrawals are not penalized if used for non-may have access to expenses, but the money is still taxable income. After age 65, HSA withdrawals for non-may have access to expenses are taxed but not penalized — the account functions like a traditional retirement account at that point.

Tracking Your Balance and Making Withdrawals

Most HSA and FSA providers offer an online portal or mobile app where you can check your balance, view transactions, and download statements. Log in anytime to see how much you have contributed, how much you have spent, and how much remains. This is especially important for FSA holders, since unspent money is forfeited at year-end.

To withdraw money, you typically use a debit card issued by your account provider. You can also request a check, transfer funds to your personal bank account, or reimburse yourself for expenses you paid out of pocket. If you reimburse yourself, keep the receipt — the IRS can audit your account and ask for proof that the expense was may have access to.

Some providers charge monthly maintenance fees, investment fees if you invest the money, or per-transaction fees. Compare providers before opening an account. Many credit unions and online banks offer HSAs with no fees if you maintain a minimum balance.

Frequently Asked Questions

Can I have both an HSA and an FSA at the same time?

No, not in most cases. If you have an FSA, you cannot open an HSA in the same year. The exception is a "limited-purpose FSA," which covers only dental and vision expenses — you can have both a limited-purpose FSA and an HSA. Ask your employer whether they offer a limited-purpose FSA if you want both accounts.

What happens to my HSA if I leave my job?

Your HSA stays with you. It is your account, owned by you, not your employer. You can keep contributing to it if you remain enrolled in an HDHP, or you can leave it untouched and withdraw from it later. If you switch to a non-HDHP health plan, you can no longer contribute, but you can still withdraw for may have access to medical expenses.

Can I invest the money in my HSA?

Yes. Many HSA providers allow you to invest your balance in stocks, bonds, or mutual funds, similar to a retirement account. FSA money is typically held in a cash account and cannot be invested. Investing an HSA makes sense if you do not plan to use the money soon and want it to grow over time.

Do I need to file anything with my taxes for an HSA or FSA?

For an HSA, if you contribute through payroll deduction, your employer reports it on your W-2 and you do not need to file anything extra. If you contribute directly, you report it on Form 8889 when you file your tax return. For an FSA, your employer handles all reporting — you do not file anything.

What if I do not use all my FSA money by the end of the year?

The money is forfeited and goes back to your employer. Some employers offer a grace period of up to 2.5 months into the next year to spend remaining funds, but this is not may provide. Check your FSA plan documents to see if your employer offers this option. HSAs do not have this rule — unused money rolls over indefinitely.