Even the most seasoned HR or benefits professional can get lost in the alphabet soup that is the world of spending accounts. Between FSAs, HRAs, and HSAs alone there are countless rules and plan options that can escape those who don’t interact with these accounts for a living. Add to that the recent introduction of the LSA (Lifestyle Spending Accounts) and the confusion only grows.

Below is a concise overview of the five account types we’re asked about most often by employers trying to improve the financial wellbeing of their workforce, followed by a brief update on how the One Big Beautiful Bill Act affected Dependent Care FSAs and HSAs.

1- Health Flexible Spending Account (Health FSA)

A Health Flexible Spending Account (Health FSA) is an employer-sponsored account funded typically by employee pre-tax payroll deductions to pay for IRS-qualified medical, dental, vision, and prescription drug expenses.

• Funded by employees (and sometimes employers) via a Section 125 cafeteria plan; money is deducted from the employee’s paycheck on a pre-tax basis. The ACA limits employer funding to a Health FSA to either $500 or a 2x match of the employee’s contribution.
• A great option for employees ineligible for an HSA (Health Savings Account), especially if they don't have an HSA-qualified medical plan.
• Use-it-or-lose-it rules generally apply; however, some plans allow a carryover or grace period based on plan design. For 2026, the maximum contribution to a Health FSA is $3,400 and the maximum carryover, if allowed by the plan, is $680.

Health FSA Pro Tip: Does your organization offer a Health Savings Account (HSA) option? If so, consider adding the carryover provision to your Health FSA plan design. The carryover option is more compatible with an HSA for individuals who are moving from a Health FSA to HSA from one year to the next.

2- Dependent Care Flexible Spending Account (DCFSA)

A Dependent Care FSA (DCFSA) is an employer-sponsored account funded typically by employee pre-tax payroll deductions to pay for IRS-qualified care expenses (childcare, adult care, preschool, and day camps) for qualifying dependents, typically children under age 13 or certain adult spouse/other tax dependents.

• Funded by employees (and sometimes employers) via a Section 125 cafeteria plan; money is deducted from the employee’s paycheck on a pre-tax basis. Employers may fund DCFSA accounts on behalf of an employee; however, all contributions accumulate towards the annual limit shared below.
• Use-it-or-lose-it rules generally apply; however, some plans allow a grace period based on plan design. For 2026, the maximum contribution to a DCFSA is $7,500.

DCFSA Pro Tip: Don’t forget about non-discrimination testing! While all cafeteria plan benefits are subject to non-discrimination testing, DCFSAs have the most restrictive tests to pass. Employers can get ahead of the oft-failed 55% Average Benefits Test by running a projections test and making adjustments early in the plan year.

3- Health Savings Account (HSA)

A Health Savings Account (HSA) is an individually owned savings account available when an individual is covered by an HSA-qualified health plan.

• Funded by employees (and sometimes employers). If offered via a Section 125 cafeteria plan, money is deducted from the employee’s paycheck on a pre-tax basis.
• Funds never expire, the account is portable if the employee changes employers, and it can be used for a broad list of IRS-qualified medical expenses.
• HSAs are a triple tax-free account: contributions are made before taxes, money can be invested and grow without the need to pay gains taxes, and money can be distributed tax-free if used for qualified expenses. The beauty of the HSA is that, once funded, an individual can draw from the account from that point forward for the rest of their life. Some individuals will actually save 100% of their HSA until retirement and tap into the funds only to cover medical, dental, and vision expenses once retired.

HSA Pro Tip: Remind your employees that most HSAs offer an investment option! While not all employees want to take advantage of this option, many don’t simply because they aren’t aware that the option is available. 

Accounts Funded Solely by Employers

4- Health Reimbursement Arrangement (HRA)

A Health Reimbursement Arrangement (HRA) is an employer-funded, employer-owned account that reimburses eligible medical expenses as defined by the plan.

• Funded 100% by employers, HRAs require a Plan Document which details plan eligibility, qualified expenses, and more.
• Most HRAs are integrated with an employer-sponsored health plan, and while HRAs can cover a wide array of medical, dental, and vision expenses, many HRAs are specifically set up to help cover employees’ health plan deductible costs.

HRA Pro Tip: Don’t forget that HRAs are a COBRA-eligible benefit! Employers should ensure that if an HRA is offered to active employees, it is also offered as part of the COBRA election process.

5-Lifestyle Spending Account (LSA)

A Lifestyle Spending Account (LSA) is an employer-funded, post-tax account the employer customizes to support broader well-being needs (e.g., fitness, financial wellness, family and everyday supports); reimbursements are taxable to the employee after they spend the dollars.

• Funded 100% by employers, LSAs do not require any formal plan document, but should have a policy that outlines plan rules and eligibility.
• Employers choose eligible categories and how much employees receive; LSAs are not governed by the same IRS rules as pre-tax FSAs/HSAs, making them highly flexible for non-medical life expenses.

LSA Pro Tip: Don’t blend your LSA with your other pre-tax accounts! LSAs are meant to be an extremely flexible and malleable benefit for employers to establish; however, the list of expenses covered under the LSA shouldn’t include services and products that can be reimbursed from another non-taxable plan.

What the One Big Beautiful Bill changed for DCFSAs and HSAs

The One Big Beautiful Bill Act (enacted July 4, 2025) included several reforms that expand access and flexibility, especially for HSAs, and increased the DCFSA maximum. Here are the headlines that matter for 2026 and beyond:

• Dependent Care FSA: The maximum contribution limit increases to $7,500 for tax years beginning after December 31, 2025 (previous limit was $5,000 under longstanding rules). For employers looking to allow employees to take advantage of the $7,500 limit for 2026, make sure that your Plan Document is updated to reflect the updated contribution maximum.
• HSA eligibility and usage:
• Certain ACA marketplace Bronze and Catastrophic plans will be treated as HSA-qualified coverage beginning January 1, 2026, opening HSA access to more individuals in those plans.
• HSA funds can be used tax-free to pay monthly fees for direct primary care (DPC) arrangements up to specified limits ($150/month individual; $300/month for arrangements covering more than one person), effective January 1, 2026; DPC is clarified not to be disqualifying coverage for HSA eligibility within those limits.
• The safe harbor allowing pre-deductible telemedicine coverage in HSA-qualified HDHPs is restored and made permanent, retroactive to plan years beginning after December 31, 2024.

Summary

Each of these accounts serves a distinct purpose. FSAs and HRAs help cover health costs during the plan year and serve as alternatives to an HSA; HSAs pair with a qualified health plan to build lasting, portable health savings; DCFSAs support daycare expenses for any dependents; and LSAs flex to your culture and people needs to cover whatever is left. With the latest legislative changes, more people will be able to access HSAs, and families using DCFSA can set aside more on a pre-tax basis starting with 2026 tax years.

For employers offering these accounts, routinely communicate about these accounts throughout the year to mitigate confusion.  And lean on your consulting and administration partners to help your employees understand and get the most out of what’s available. These accounts are widely underutilized, but your vendor partners can assist with getting employees enrolled and providing tools to make the user experience seamless. 

Scott Riordan, SVP, Health & Welfare |  Sentinel Group
www.linkedin.com/in/scott-riordan-sentinel