End-Year-Deadlines Are Approaching: FSA and HSA Distinctions Explained

Last week I received an urgent text from my friend Miranda.  “My husband accidentally put $3,000 on his HSA that we have to use by the end of the month!  Any suggestions?” Only a personal finance nerd like me would get hyped up at this opportunity to educate her on the differences between a Flexible Spending Account (FSA) and a Health Savings Account (HSA). But the differences DO affect whether or not you need to panic about end-of-year deadlines.

In the realm of healthcare finance, FSAs and HSAs stand out as valuable tools to manage medical expenses efficiently. Both offer tax advantages and flexibility, yet they differ in key aspects. Let's delve into the distinctions between FSA and HSA accounts and provide practical examples of how to strategically spend from each.

Flexible Spending Accounts (FSAs) Unveiled

Flexible Spending Accounts (FSAs) are employer-sponsored benefit plans that allow employees to contribute pre-tax dollars toward qualified medical expenses. Here are the fundamental characteristics of FSAs:

Pre-tax Contributions: Employees can allocate a portion of their pre-tax salary to an FSA, reducing their taxable income.

Use-it-or-Lose-it Rule: A significant aspect of FSAs is the "use-it-or-lose-it" rule. Generally, any remaining funds at the end of the plan year are forfeited, although some employers may provide a grace period or a limited carryover.

Employer Contributions: While less common than with HSAs, employers have the option to contribute to employees' FSAs.

Examples of FSA Spending:

•  Prescription Medications: FSA funds can be used to cover the costs of prescription medications prescribed by a healthcare professional.

• Co-payments and Deductibles: Use your FSA to handle co-payments and deductibles for medical services, lightening the out-of-pocket burden.

• Vision and Dental Expenses: From eye exams to orthodontic treatments, FSAs often cover a range of vision and dental expenses.

Health Savings Accounts (HSAs) Explored

Health Savings Accounts (HSAs) are designed for individuals covered by high-deductible health plans (HDHPs) and provide triple tax benefits. Here's a closer look at HSAs:

 Triple Tax Benefits: Contributions are tax-deductible, earnings grow tax-free, and withdrawals are tax-free when used for qualified medical expenses.

Portability: Unlike FSAs, HSAs are portable. They belong to the individual, allowing for continuity even when changing employers or retiring.

No Use-it-or-Lose-it Rule: HSAs don't have a use-it-or-lose-it rule. The funds roll over from year to year, fostering long-term savings and potential investment growth.

Examples of HSA Spending:

• Qualified Medical Expenses: HSAs cover a broad spectrum of medical expenses, including doctor visits, hospital stays, and prescription medications.

• Long-Term Care Insurance Premiums: If you're over 65, HSA funds can be allocated to pay for long-term care insurance premiums.

• Medicare Premiums: Certain Medicare premiums, such as Part B and Part D, are eligible for payment using HSA funds.

 Before you panic on December 31st and buy a thousand dollars’ worth of bandages, take a closer look at your employer plan.  Ask these three key questions: which plan do I have, how much is my remaining balance for the year, and will it rollover?  If you still need to spend down your balance, check out the HSA Store and the FSA Store where all items are eligible.