Unexpected medical expenses can really drain personal finances, especially for those on a high-deductible health plan (HDHP). Large out-of-pocket expenses sometimes prevent people from seeking the medical treatment they might need.
So, how do you prepare for and handle these healthcare expenses as they arise? You might be eligible to participate in a tax-advantaged savings plan that allows you to use your funds for eligible healthcare expenses.
The type of plan you can participate in and the amount you can save depends on your situation. Keep reading as we explain everything you need to know about Flexible Spending and Health Savings Accounts.
Overview Of Healthcare Spending Accounts
Healthcare costs are rising, and you should consider taking advantage of every opportunity available to help with those costs. The Federal government allows you to save tax-free for these expenses under certain conditions.
The two most common types of accounts are the Flexible Spending Account (FSA) and Health Savings Account (HSA). Even if you have health insurance, these savings accounts can help offset the costs associated with your healthcare for things not covered by insurance. You might even be able to use the funds for childcare or over-the-counter medication.
At the elementary level, these accounts are pretty similar. They both allow you to save money for qualified medical expenses, and you are not taxed on the money you save in either account. However, there are also many differences, such as the way they are funded, who can participate, and what types of expenses will qualify. Keep reading as we dive into the details of each type of account and highlight the key differences between the two.
KEY TAKEAWAYS
- The most common healthcare savings accounts are the Flexible Spending Account (FSA) and Health Savings Account (HSA).
- Contributions to an HSA are tax-deductible, but you must be enrolled in a high-deductible health plan to contribute.
- You can utilize the funds in an HSA and FSA to pay medical deductibles, copays, and other healthcare expenses.
What Are HSAs and FSAs?
HSAs and FSAs are accounts recognized by the IRS that allow an individual to save money that can be used for medical costs. The contributions to these accounts are tax-deductible, so you could potentially see decent tax savings by participating in one of these accounts.
Health Savings Account (HSA)
You might be wondering, “What is an HSA?” An HSA is a savings plan for those covered under a high-deductible health plan. These types of health insurance plans require a sizeable deductible payment before the insurance plan begins to pay for expenses. Sometimes, the deductible may be as large as $6,000 or more per family. By making HSA contributions, you can use your HSA funds to help cover this deductible when you receive treatment.
An HSA may be established by employees or even self-employed individuals covered by an HDHP. If the funds from an HSA are not used during a calendar year, they will usually roll over into the next year. Most people set up automatic payroll deductions to contribute funds to their HSA. This ensures a standard contribution amount so that there is money in the account when the time comes to use it.
Flexible Spending Account (FSA)
An FSA is managed and owned by your employer; a self-employed individual cannot establish it. These accounts are funded through employee and/or employer contributions. The amounts you contribute are tax-deductible, so those amounts are not considered taxable income for income tax purposes.
FSA contributions are generally considered “use it or lose it” funds. They do not roll over from year to year, although your employer may elect to allow a small rollover of funds or an extended period to use them. You may choose to use your FSA as a dependent care FSA, enabling you to pay for childcare expenses with the funds.
Must read articles related to Healthcare
- Steps to sign up for Medicare
- Learn about the benefits of living trusts.
- Learn about the differences between a living trust and a will.
- How might a Healthcare Proxy help you?
- How to protect your personal information from being stolen.
Key Differences Between HSA And FSA
Eligibility
Even though the purpose of these accounts is quite similar, there are many differences between an FSA and an HSA. The first difference between an HSA and FSA is the eligibility requirements. The only requirement to participate in an FSA is that your employer must establish it. Once it is established, any employee may participate in the plan. However, to participate in an HSA, an individual must be enrolled in a high-deductible health plan. In addition, that person cannot be eligible for Medicare and cannot be claimed as a dependent on someone else’s tax returns.
Contribution Limits
The annual contribution limits between these two plans are also different. An HSA allows you to save more money than an FSA. In 2024, an individual may contribute up to $4,150 to an HSA for a self-only plan and up to $8,300 for a family coverage plan. On the other hand, FSA contributions max out at $3,200 per individual and $6,400 per household. With an HSA, you can change the amount you contribute to the account at any time during the plan year. However, an FSA is not so flexible. You can only change your contribution amount during open enrollment or after a qualifying life event.
Account Ownership
Ownership of the account and what happens to your funds at the end of the year or if you change jobs is vastly different between an HSA and FSA. With an FSA, you typically lose your funds when you change jobs. Your employer owns your healthcare FSA account, so unless you are eligible for health coverage and account continuation through COBRA, you will lose your funds when you change jobs.
However, an HSA belongs to you; you can carry it from one employer to another. Your flex spending account funds do not carry over to the following year, so you lose your unused funds. Conversely, the balance in your HSA can continue to grow yearly if you do not spend the money.
Qualified Expenses
While there are some differences in eligible expenses between the two, many of them are the same. You can use the money for obvious costs like copays or medical treatment (similar to items covered under Medicare Part B). In many cases, you can also use the pretax funds in your account for prescription or over-the-counter medicine. If adequately established and documented, you can use your FSA and HSA account funds to pay for dental expenses or vision care. HSA plans typically come with an HSA card that acts like a debit card and allows you to pay for items directly from the account without a complicated reimbursement process.
| HSA | FSA | |
|---|---|---|
|
Eligibility |
Enrolled in High Deductible Health Plan (HDHP)
Cannot be claimed as dependent by someone else Not eligible for Medicare |
Employer must set up account |
|
Contributions Limits |
In 2024, you can contribute up to $4,150 annualy for a self-only HDHP
A family HDHP can contribute $8,300 annually |
In 2024, you can contribute up to $3,200 per year per employer.
|
|
Carryover Rules |
Any unused money rolls over to the next year. |
You can rollover a maximum of $640 into 2025
Employer may elect to allow additional 2 1/2 months to spend unused funds |
|
Contribution Changes |
Changes can be made anytime |
Changes can only be made during open enrollment or after a life event |
|
Account Ownership |
Owned by individual and taken with you when you leave employer |
Owned by the employer and cannot be transferred to a new employer. |
TIP
A Health Savings Account (HSA) is a great way to reduce taxes and save for current or future healthcare expenses. Funds in an HSA can grow tax-free if distributions are made for qualified medical expenses.
Explanation Of Eligible Healthcare Expenses
HSA-eligible and FSA-eligible expenses are similar, although an FSA sometimes provides more flexibility for over-the-counter specific expenditures. At a basic level, any treatment deemed medically necessary by your doctor will be covered under either plan.
Prescription medications will be covered, and many over-the-counter medicines are covered, although you may need a prescription for them to use your HSA funds. Some alternative medical treatments might also be covered, although you might need a letter from your doctor stating that the treatment is medically necessary. Here are a few examples of expenses eligible for FSA or HSA.
HSA Eligible Expenses
- Over-the-counter acne treatments (with prescription)
- Alcoholism treatment
- Chiropractic care
- COVID testing
- Eye examinations
- Immunizations
- Massage therapy (with a letter from the doctor)
FSA Eligible Expenses
- Over-the-counter acne treatments (no prescription necessary)
- Alcoholism treatment
- Chiropractic care
- Eye examinations (if established as limited-purpose FSA)
- Immunizations
- Massage therapy (no letter from doctor required)
- Nasal Spray
- Childcare expenses
The Bottom Line
If you want some help paying for your healthcare and saving a few tax dollars simultaneously, consider participating in an HSA or FSA. The type of plan you can participate in depends on your health insurance coverage and employer.
To participate in an HSA, your health insurance must have a minimum deductible; for an FSA, your employer must sponsor the plan.
You can pay for a wide range of expenses with both types of accounts, although you should always be sure to save your receipts and documentation in case the IRS decides to dig a little deeper at tax time.
Frequently Asked Questions
The answer to this question depends on your situation. You typically cannot participate in both plans, so you must choose the best option for you and your family.
If you participate in an HDHP, an HSA might be your best option. Your funds can carry over from year to year, and you get to take them with you if you change employers. In addition, you can also change your contribution amounts at any time.
The drawback is that you lose some flexibility in spending the funds. You might need a prescription or a letter from your doctor to use the funds on over-the-counter medications or alternative treatments.
The allowable expenses under both types of plans are very similar. Each plan will pay for doctor office visits, prescription medications, hospital stays, and other obvious medical expenses. However, an HSA is slightly more restrictive regarding alternative treatment or over-the-counter medicines.
With an HSA, you will often need a prescription, even for over-the-counter medications, for the expense to be eligible. Regarding alternative treatments, you typically need a letter from your doctor stating that the treatment is medically necessary.
An FSA is generally more flexible for these types of expenses. You can buy over-the-counter medications like aspirin or acne treatment without a prescription, and it still qualifies as an eligible expense. You can also use FSA funds to pay for childcare expenses if you have designated the account as a childcare FSA.
An HSA has many benefits. The first benefit is the tax advantage that you will see. Contributions to the account are tax-deductible, so your tax bill will be a little lower. Next, you can change your contribution amount anytime during the year. You don’t need to wait until open enrollment or have a qualifying life event.
If you change employers, you can take the account with you. The account and money belong to you, so you can transfer it to another provider and continue contributing as long as you remain enrolled in a high-deductible health plan.
Finally, the funds in your account will not be lost at the end of the year. They will carry over to the next year, and the balance in your account will continue to grow until you spend it.
A health savings account works similarly to a regular checking account. In most cases, it even comes with checks and a debit card! You deposit money into the account and then use those funds to pay for eligible medical expenses.
When you visit the doctor, use your HSA debit card to pay for your office visit. If you need to pay for prescription medication, you can pay directly from your HSA account.
Since you can only use the funds for qualified expenses, you need to ensure that you save all your receipts and documentation for items you purchased with those funds.
The IRS might decide to audit your expenditures from your HSA account. In that case, you must prove that everything you spent from the account was proper. Spending money on items that do not qualify could subject you to withdrawal penalties and additional income taxes. You do not want to end up in that position!
FSA funds can be used to pay for medical items, equipment, and services for you, your spouse, and your dependents. The IRS maintains a complete guide detailing what qualifies as an eligible FSA expense.
The FSA rules are pretty flexible, and you can use these funds to pay for flu shots, immunizations, doctor office visits, prescription eyeglasses, aspirin, acne medication, first aid kits, and many more items.
Sometimes, you might need a letter from your doctor stating that the expense is medically necessary. For example, you can use the funds to pay for fitness programs if your doctor has deemed a specific program medically necessary to treat a medical condition. Again, save all this documentation and your receipts for every expense.
Generally, you cannot have both an HSA and FSA. You might be able to utilize both accounts if you have designated your FSA as a limited-purpose FSA, such as one for childcare expenses.
You can, however, utilize an HRA in addition to an HSA or FSA. An HRA is a Health Reimbursement Arrangement funded solely by your employer. You can use the funds in this account to reimburse yourself for medical expenses. Often, your employer will fund these accounts with an amount based on your salary or years of service with the company.
This is simply a benefit some employers provide, and the contributions to these accounts are not tax-deductible. While you can use them to pay for certain expenses, the funds cannot be used for your standard health insurance premiums.
You can find a Social Security Administration office near you by using our SSA office locator and searching for your closest location.
