Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are programs that make it easy for you to receive significant tax benefits when you pay for qualified out-of-pocket medical expenses.
You can use a pre-loaded debit card or get reimbursed from an FSA or HSA account after you make your purchase or a combination of both methods.
Each has its own advantages and disadvantages. That's why it's important to determine which is right for you if you have the choice.
For example, with an FSA you have instant access to the funds. You decide how much you want to put aside (within the maximum permitted) and your employer funds the account upfront for you. You pay your employer back in installments through set payroll deductions. This avoids having to come up with a large sum of money all at once.
You may have heard of the "Use It Or Lose It" rule. Fortunately the IRS modified it at the end of 2019. Now your employer has the option to permit you to roll over up to $500 of your FSA funds (with some restrictions). Check with your plan administrator.
An HSA is more clear-cut. You may roll over all of your savings with no restrictions. But unlike an FSA, your employer does not fund your account upfront. Your funds become available as you add them. Your employer has the option to contribute to your HSA just like they can with an FSA.
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Just remember that all FSA- and HSA-authorized products must be purchased separately from non-eligible items.
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An FSA—Flexible Spending Account (also known as a flexible spending arrangement)—is a special account you put money into that you use to pay for certain out-of-pocket health care costs. The money that you use to fund the account is tax free! It is deducted from your paycheck. No payroll taxes are taken out and you don't pay taxes on the money at the end of the year. According to FSAFEDS, the FSA program for federal employees, an individual can save an average of 30% annually on eligible medical expenses with an FSA.
At the start of your health insurance plan year, you estimate how much money you think you will spend on out-of-pocket medical expenses during your plan period. Your employer then funds your account using their money. And just like that, your money is available to pay for qualified medical expenses. You pay back the money that your employer initially funded using a set amount of pre-tax dollars that your employer automatically deducts from your pay.
You may use a special FSA debit card that is pre-loaded with the funds you put aside to pay for costs or you can use other funds and get reimbursed from the account at the end of the plan year. The advantage of the debit card is that the money is already there with no payroll taxes taken out and there is no paperwork for you to do. Although you may need to retain your receipts for IRS purposes.
No. FSAs are employer-sponsored, which means which means you can only participate in the program if your employer offers it as part of your health insurance benefits.
The maximum amount that you can put into an FSA is determined by the IRS. The amount may be adjusted each tax year to keep up with cost of living changes. The maximum amount permitted for self-only for 2020 is $3,550. The maximum amount that may be contributed for a family in 2020 is $7,100. Employers may elect a lower limit as part of their Healthcare FSA plan structure. Your human resources department will be able to provide you with information you need about your specific company FSA rules.
Your employer is not required to make contributions but some do to offer greater benefits to their team.
FSAs follow a "use it or lose it" rule, which means if you do not use the money designated for that year you will lose it. There are a few exceptions, however.
These are FSA "use it or lose it" exceptions:
Rollover or extension:
Rollover or extension:Your employer is permitted to allow you to roll over up to $500 or permit a 2.5 month grace period to file claims for expenses incurred during that plan year but this is up to each individual workplace. Your employer cannot grant both the roll over and the 2.5 month extension.
90-day runout period: After the end of a FSA plan year, there is a 90-day runout period in which claims can still be submitted for expenses during the plan year after the end of the regular plan year end. The runout period applies to terminated employees or canceled plans. The runout period can be used for both Health Care and Child & Elderly Care FSAs.
Your employer gets your unused FSA funds.
No. It is against IRS rules for your employer to return your unused FSA funds to you. However, your employer can split any unused FSA funds among employees participating in the FSA plan or use it to offset the costs of administering benefits. Your employer may also allow you to roll over some funds, grant an extension of time to use the funds, and there are certain situations where you have extra time to use the money.
No, unless you meet certain Qualifying Life Events (QLE).
- Change in legal marital status (i.e., marriage, legal separation, divorce, or death of employee's spouse).
- Change in employment status (for employee, their spouse, or dependent) that affects eligibility for health insurance benefits.
- Change in number of tax dependents. For example, if one of your dependents turns 26, you may want to reduce your contribution to reflect the loss of that dependent.
- Birth or date an employee adopts a child, or placement for adoption.
- Death of spouse or dependent.
- Change in dependent’s eligibility (for example, employee's child reaches age 13 where he/she is no longer eligible under a Child & Elderly Care FSA).
- For Child & Elderly Care FSA only, a change in child care/elder care provider or cost or coverage, such as a significant cost increase charged by the current day care provider, or a change in the day care provider.
You have 30 days from the QLE to make changes or enroll in an FSA. The change to the FSA or the enrollment into the FSA will be effective the first of the month in which you incurred the QLE. Check with your FSA administrator for all details.
An HSA is a special account that provides tax benefits to you on money that you use to pay for certain out of pocket medical expenses that are not covered by your health insurance. The tax savings depend on how you fund your account. No payroll taxes are deducted if you fund your HSA with your earnings. If you fund your account with money that you already paid taxes on, you can deduct that money from your income tax. An HSA can only be offered in conjunction with a High deductible Health Plan (HDHP).
All you need to do is put money in your qualifying HSA account and the money is available for use. There are several ways to fund your HSA:
- Direct payroll deposit that your employer manages for you. No payroll taxes are deducted and you do not have to report the money as income on your annual taxes.
- You may also deposit money into your account using a check or a money transfer. If you contribute to your HSA using funds that you already paid taxes on you can deduct that money from your income when you file your taxes.
- You may also make a one-time tax free transfer from your IRA.
- Your spouse may also contribute to your HSA if your are both covered under the same HDHP.
In addition to requiring an HDHP, the following criteria apply:
- You must have a valid Social Security Number and a primary residence in the U.S.
- You cannot be covered by any other type of health plan, including Medicare Part A or Medicare Part B.
- You cannot be claimed as a dependent on another person's tax return (unless it's your spouse).
- You must be covered by the qualified HDHP on the first day of the month.
You may use a special HSA debit card that is pre-loaded with the money to pay for costs or you can use other funds and then reimburse yourself from your HSA account.
Yes, you can create your own HSA if you have an HDHP that you have purchased on your own.
Maximum contributions are determined by the IRS and may change each year. For 2020 the maximum contribution for self-only is $3,550 and $7,100 for families. Individuals age 55 or older can contribute an additional $1,000 annually to their individual or family account. It is called a "catch up."
Your employer is not required to make contributions but some do to offer greater benefits to their team.
You can roll over unused HSA funds roll over year to year; there is no "use it or lose it" penalty.
There is no max on how much money you can roll over in an HSA. In fact, funds that are rolled over continue to grow and earnings are tax free. At age 65, you can use your HSA funds for any purpose on a taxable basis.
Yes, you are able to withdraw money from your HSA at any time for non-medical expenses but you have to pay income taxes on the money, and if you withdraw before the age of 65, you must pay a 20% tax penalty.
Yes, there are a variety of investment options. Your HSA concierge may have suggestions or you can find a bank or investment company that offers the service.
Yes, there are no restrictions.
After turning 65 you can use your HSA funds for non-qualified expenses, like a trip around the world or home renovation. You’ll pay regular income tax on those funds, but the 20% tax penalty no longer applies. Your HSA is a great way to take care of your health and prepare for retirement by saving money that is income tax free.
|Can pay with own funds and/or submit receipts for reimbursement||Yes||Yes|
|Immediate reimbursement or at the end of the year||End of the year||Immediate|
|Receipts required||Save for tax purposes; may be required for reimbursement||Save for tax purposes; may be required for reimbursement|
|Create on my own||No||Yes, if you have your own HDHP|
|Funded with my pre-tax earnings||Yes||Yes|
|Withdrawn from my paycheck||Yes||Yes, but optional. You may also self-fund|
|Employer contribution||Yes (decided by employer; not required)||Yes (decided by employer; not required)|
|Spouse may contribute to the fund||No||Yes|
|Roll over funds||Yes||Yes|
|Roll over maximum||$500 (availability decided by employer)||None|
|Maximum individual annual contribution||$3,550||$3,550|
|Maximum family annual contribution||$7,100||$7,100|
|Portable if I leave my job||Possibly. Runout period may apply.||Yes|
|Change contribution during the year||Possibly. If you have a Qualifying Life Event||Yes|
|"Catch up" permitted||No||Yes|
|Maximum "catch up" contribution||n/a||$1,000 for 2020 for self and family|
|Funds can be invested||No||Yes|