HSA and FSA: What’s the Difference?
For Some Employers, it’s almost Open Enrollment time!
It’s that time of year when you stare blankly at your open enrollment web page or packet full of glossy brochures. Suddenly, “benefits” seem overwhelming. You have Googled “deductible” and determined that since you don’t own a crystal ball or have a fast-pass at your local fortune teller, your chances of choosing the perfect mix of benefits are slim to none.
Beyond choosing the right health plan, it’s a smart choice to also consider tax-advantaged spending and saving accounts if your employer offers them. You don’t need a secret decoder ring to understand how a health care flexible spending account (FSA) or a health savings account (HSA) can put some money IN your pocket while helping you cover out-of-pocket medical costs, both planned and unplanned.
Here are a few simple steps to help you understand the benefit of HSAs and FSAs:
Determine if you have out-of-pocket medical costs for you or your family members.
Think about paying for things like: co-pays or doctor visits, dental cleanings or procedures, prescriptions, vision correction (contacts, glasses), orthodontia, chiropractic care, first aid supplies, reading glasses, and more.
If yes, then consider enrolling in either an FSA or an HSA. You’ll need to think of these as partners with your health plan options.
Many employers offer a variety of plans, such as a PPO, HMO, or HDHP (more acronyms!). The health care FSA is compatible with the PPO or HMO plans (plans with co-pays that can cost more up front). The HSA is compatible with the high deductible health plan (HDHP), which is likely a lesser cost from your paycheck, and a greater financial burden if you do need services beyond routine care. With each plan, contributing to a tax-advantaged account can help. You typically can’t contribute to both a health care FSA and HSA at the same time, unless your employer offers a Limited Purpose FSA in addition to an HSA. If you know you’re going with a particular health plan, then your decision is made for your spending or saving account.
What’s the Same between an HSA and FSA
- Both accounts cover eligible medical expenses and are funded by contributions taken from your paycheck.
- Primary access to funds is usually through use of a payment card or claims submission.
- Both an HSA and FSA are funded with PRE-TAX money. That’s where the word BENEFIT really comes into play. You can reduce your overall federal taxable income, and you are getting more bang for each buck that you spend.
- Some employers offer “seed” money for both an FSA and an HSA. Double-check your company’s matching or offering benefit. This would be tax-free money you can spend as needed.
What’s Different Between an HSA and FSA?
Does it expire at the end of the year?
- FSAs have an “expiration date” of some kind. Depending on your employer, you may have to spend all the funds within the calendar year, within 14.5 months (grace period), or be able to roll-over up to $500. In any case, they are chiefly a “use it or lose it” plan.
- HSAs, on the other hand, don’t expire. An HSA is your bank account to use for qualified medical expenses for as long as you want.
What if I leave my employer?
- FSAs are a benefit of a particular employer. Depending on the employer, you may be able to spend it down for the year, if you have remaining funds.
- HSAs are a personal bank account and completely portable. The money in the account is always yours to use. You can roll it over to your new HSA provider if you are eligible in the future, or you may maintain it, let it gain interest, and use it as you need it.
Are there special rules about one or the other? Am I eligible?
- There are several types of FSAs you can enroll in. The only thing that will opt you OUT of a health care FSA is active contribution to an HSA. However, you would still be eligible to contribute to a dependent care FSA or a limited purpose FSA. More on that in a moment…
- If you are covered by an HDHP health plan, you are eligible to open and contribute to an HSA.
- If you are receiving Medicare, you would not be eligible to open and contribute to an HSA; however, if you have one already, you can use your funds as needed for eligible expenses.
- If you are a dependent on someone else’s tax return, you cannot have your own HSA
What about receipts?
- For all FSAs, the IRS requires documentation to verify the expense. Every time you use your FSA, you’ll want to save the receipt, explanation of benefits (EOB), or doctor visit bill. Depending on your FSA provider, the system can recognize recurring claims, such as your co-pay or recurring prescription expenses, and the receipt would not be necessary.
- HSAs can be used on medical expenses without having to submit documentation; however, keep those receipts and EOBs to reconcile your expenses and justify expenditures if the IRS requests verification of your HSA expenditures. It’s always a good practice to save and file your documentation.
Remember! Always compare information with your employer’s plan information, and talk with your HR representative about your company’s specific plan details.