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You've Got Questions, We've Got Answers: Health Savings Accounts vs. Flexible Spending Accounts
November 16, 2018
That time of year is here again: open enrollment on the Affordable Care Act (ACA) Exchange as well as at most companies that offer employees insurance. It’s a time rife with acronyms, including two increasingly popular ones: FSA, which stands for flexible spending account, and HSA, which stands for health savings account.
Both of these accounts can provide solid tax benefits by allowing you to make contributions out of your gross pay. These pre-tax dollars are set aside so that you can use them to pay for a variety of qualified medical expenses. You cannot have both a HSA and a health FSA at the same time (unless it’s a limited purpose FSA restricted to dental and vision care expenses only), and you must be on a high-deductible health plan (HDHP) in order to have a HSA. If you have both options available to you, make sure you clearly understand the difference between the two before deciding on one (or neither).
Health Savings Account (HSA)
Q. Who is eligible?
A. A HSA is meant for setting aside pre-tax money to help meet the deductible on a HDHP, so you need to be currently enrolled in one of these plans in order to qualify. Eligible plans are available through private insurers as well as through the ACA Exchange, and are offered by many employers.
Q. What can I contribute?
A. As little or as much as you would like, up to the yearly limit set by the IRS. The limits for 2019 are $3,500 for an individual or $7,000 for family coverage. If you are age 55 or older, you can contribute an additional $1,000. Any money contributed by your employer counts toward these maximums.
Q. Can I change my contribution?
A. You can modify your contribution amount at any time.
Q. When can I make a withdrawal?
A. You can withdraw funds at any time after they’ve been deposited and use them to pay for qualified healthcare costs, ranging from your health insurance deductible to prescription medications, eye care and medical supplies. (But some health-related items that you might assume would qualify are in fact ineligible, and if you mistakenly withdraw funds for an unqualified bill you’ll be taxed, so always double-check.)
Tip:
One of the greatest benefits of a HSA, and one that you can use to your full advantage with a little bit of savvy, is that you don’t have to withdraw the funds right at the time you incur the expense. If you save receipts, you can submit them years down the line. Say you pay for a qualified medical expense out-of-pocket because you have the money at the time. You carefully save the receipt, and a few years later you find yourself facing a more major expense. You can then submit that saved receipt and withdraw funds from your HSA tax-free.
Q. Can these funds be invested?
A. You can invest your HSA funds. Investing options vary depending on your HSA provider and could include mutual funds, stocks, bonds and/or ETFs. Earnings are tax-free provided they’re used for approved medical expenses.
Q. So, what happens to unused funds?
A. The funds in your HSA belong to you, even if you leave your job. You can carry them over from year to year—in fact, some people choose to pay current medical costs out-of-pocket and allow their HSA savings to grow, essentially treating the HSA as a retirement account.
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Health Flexible Spending Account (FSA)
Q. Who is eligible?
A. Some workplaces offer FSAs as a benefit to their employees, so if yours does then you are typically eligible (unless you already have an HSA).
Q. What can I contribute?
A. You can contribute up to the maximum $2,650. The trick behind an FSA is that you need to be able to accurately predict your medical expenditures for the year. This is because you typically can’t change your contribution. If your estimate is too far off, you risk losing the unused funds. For this reason, an FSA is typically best used to pay for regular expenses like monthly prescription co-pays and contact lens orders, or for planned surgeries.
Q. Can I change my contribution?
A. Once you’ve set your contribution amount for the year, you typically can’t modify that amount without a qualifying change in circumstances.
Q. When can I make withdrawals?
A. Since your contribution is set in advance and can’t normally be changed, you can withdraw money tax-free from a FSA before it’s been deposited, up to your set contribution amount.
Q. Can these funds be invested?
A. You cannot invest FSA funds, and they do not earn interest.
Q. So, what happens to unused funds?
A. You have to use FSA funds before the year ends, or you forfeit that money. Some employers may allow you to rollover up to $500 to the next year or provide an extended grace period for submitting expenses, but you’ll need to check with your company’s human resources team to know for sure whether you these options are available to you.