FSAs and HSAs are two options you have to save pre-tax money for your healthcare expenses. In addition, they’re a helpful resource for those who have access to them. But what exactly do these acronyms stand for, and what do they do? We’ll answer those questions here.
Flexible Spending Account (FSA)
An FSA is an employer-sponsored account. You can only enroll in an FSA if your employer offers one. You can use funds from the account to pay for out-of-pocket healthcare expenses for yourself and your family (spouse and dependents). This might include deductibles, copayments, and coinsurance expenses.
Each year, the Internal Revenue Service (IRS) limits how much you and/or your employer can contribute to an FSA. This year (2022), that limit is $2,850. [1] Employers can choose to set lower amounts, but never more than the IRS limit. In addition, employees (if allowed) can carry over as much as $570 from one year to the next. But, again, this number changes annually.
The advantage of an FSA is that the funds are pre-loaded. If you decide at the beginning of the year that you’d like the entire amount deposited into your FSA, you’ll have that amount available to use right away. Your portion will be periodically deducted from your paycheck, based on the employer’s rules.
The disadvantage of an FSA is that most (if not all) of the fund has a “use it or lose it” policy. Policyholders need to make sure they spend the money before the end of the year; otherwise, it will be forfeited. Some employers have a grace period that allows you an additional 2.5 months to spend the money.
Health Savings Account (HSA)
A Health Savings Account works quite a bit differently than an FSA. Anyone enrolled in a high-deductible health insurance plan may open an HSA through their employer or a third-party administrator. As of 2022, the IRS considers any health insurance plan that has a deductible of at least $1,400 for an individual or $2,800 for a family to be a “high-deductible” plan. [2]
Employers can choose to contribute to an HSA, or the funds may come directly from the individual. Either way, they are contributed pre-tax. Like FSAs, HSAs also have yearly contribution limits. In 2022, the limit for an individual is $3,650, and for a family is $7,300. If you are over the age of 55, you can contribute an additional $1,000. [3]
Policyholders can choose to keep their contributions as “cash” in the account, which means they’ll be able to access the funds and use them to pay for out-of-pocket health and wellness services as needed. Or, they can choose to invest the funds in whatever investments are offered by the administrator. Investments grow tax-free and can also be spent tax-free, as long as they’re spent on qualified medical expenses. However, using the account to pay for non-qualified items will result in a 20% penalty.
Unlike the FSA option, HSA funds are never forfeited. Instead, they roll over from one year to the next. Plus, once you turn 65, you can use the funds to pay for non-medical expenses without incurring a penalty. As a result, HSAs are a fantastic way to reduce your taxable income and save for retirement.
We mentioned that you can spend your HSA funds on “qualified medical expenses.” What are those? Well, the list is lengthy! You can view the complete list on the IRS website, but generally speaking, here are a few common categories:
● General medical costs
● Prescriptions
● Many over-the-counter medications
● Dental expenses (including braces)
● Eyeglasses and contact lenses
● Laser eye surgery
● Lab fees
● Weight loss programs
● Massage therapy (if medically necessary)
In some cases, you can have both an FSA and an HSA. For example, you can contribute to both accounts if you have a high-deductible health insurance plan and your employer offers an FSA. However, your FSA will be considered a “limited-purpose FSA,” and you’ll only be able to use it for dental and vision expenses.
Are you looking for more health and wellness tips? Check out the educational content we have on our blog page. Our medical lab professionals are committed to giving you reliable lab results in a comfortable setting. You can book an appointment online or by calling 786-605-9198.
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[1] https://www.irs.gov/pub/irs-drop/rp-21-45.pdf
[2] https://www.healthcare.gov/glossary/high-deductible-health-plan/#:~:text=For%202022%2C%20the%20IRS%20defines,or%20%2414%2C100%20for%20a%20family