A healthcare flexible spending account (FSA) and a health savings account (HSA) can both help you save money on medical, vision, dental, and other qualified medical costs while lowering your taxes.
You can imagine how great it would be if you could have both simultaneously. Unfortunately, it is not usually possible to do this but it is not always as black and white as that. Keep reading to find out more.
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What is an FSA?
A Flexible Spending Account is a special account into which you deposit money to cover for particular out-of-pocket health care expenses.
You use your FSA by filing a claim with the FSA through your employer that includes official documentation of the medical cost and a statement that it is not covered by your plan.
You will then be reimbursed for your expenses. Inquire with your employer about how to use your particular FSA.
Any money left over in your FSA at the end of the year or grace period is forfeited.
As a result, it’s critical to plan things out and not put more money in your FSA than you expect to spend in a year on things like drugs, co-payments, coinsurance, and other approved health care expenses.
One significant benefit of an FSA is that your balance is immediately available the day you enroll.
For example, if you decide to contribute $2,400 annually with $200 monthly pretax contributions on the first of January you will have access to the entire $2,400 at the start of the year.
This means that if you have a $1,500 qualified medical expense but the FSA does not have enough money to cover it, the administrator of the FSA will still pay the full amount.
The main disadvantage is that most FSA accounts have a “use it or lose it” provision, which means you must spend all of your FSA funds before the end of the plan’s fiscal year.
If you do not comply, you will lose your FSA funds.
Select employers might choose one of two options for providing some flexibility with unused funds. An extended grace period or a rollover provision are examples of these features.
What is an HSA?
A Health Savings Account (HSA) is a tax-advantaged account set up for or by people who have high-deductible health plans (HDHPs) to save for medical expenses that qualify.
Contributions to the account are made by the individual or their employer and are limited to a certain amount per year.
Contributions are invested over time and can be utilized to pay for qualified medical expenses such as medical, vision, dental, and prescription drugs.
An HSA differs from an FSA in that it does not have a time limit or a maximum amount that can be rolled over. You will not lose your funds if you do not use them before the end of your plan year.
Each year, your untouched HSA funds are eligible to roll over with no limitations or restrictions.
Difference Between an FSA and HSA
The primary distinction between FSAs and HSAs is that an HSA is controlled by an individual and allows contributions to roll over, whereas FSAs are not as flexible and are owned by an employer.
This means that if you quit your job, your FSA funds may be forfeited, whereas any funds in your HSA are yours to keep.
FSAs and HSAs both let people save for medical expenses on a tax-advantaged basis by paying for qualified medical costs with pretax dollars.
In comparison to an FSA, HSAs have more qualification requirements.
To be eligible for an HSA, you must have a high-deductible health plan (HDHP) with a deductible of more than $1,350 for an individual or more than $2,700 for a family.
Can You Have Both an FSA and an HSA?
Most people are not allowed to have an FSA as well as an HSA because they cover similar medical costs and are reliant on your employer or health insurance.
Only if you have an HSA and want to get a limited-purpose FSA (LPFSA), which is only able to be utilized for dental and vision expenses, can you have both accounts.
The FSA has to be labeled clearly as an “HSA-compatible FSA.” If your employer provides it, you can add up to $2,550 pretax to this type of flexible spending account.
Which One Should You Prioritize?
Overall, if you qualify, the contribution rollover and higher limits of the health savings account make it a better option.
HSAs are more flexible than FSAs in that they allow you to save for future medical expenses and accumulate funds over time.
However, unless your employer gives you the ability to roll over $500 from the FSA each year, your balance will not accumulate over time.
Depending on your employer’s policy, any funds deposited into an FSA will be forfeited if not used by the end of the fiscal year.
You won’t have to choose between an FSA and an HSA most of the time because the decision is determined by your employment situation and your insurance deductible.
Check to see if your health insurance is eligible for an HSA before deciding on a plan.
If it isn’t, inquire about your employer’s FSA plan. If you don’t have health insurance and anticipate having a lot of medical bills, use our health insurance tool to see what you qualify for and whether you can use an HSA.
The only way that you can have both an FSA and an HSA is if you get a limited purpose FSA which is limited to just dental and vision medical cover.
This is not so bad though as it is better than nothing but if you are expecting to be hit with a lot of medical expenses later on in the year then it is best to contribute to both accounts.
This works best if you are maxing out your HSA, which also functions very well on its own as it is more flexible and has high limits than the FSA.
Frequently Asked Questions
You can’t open and contribute to an HSA during any month that you participate in a general Health FSA, even if you’re also enrolled in an HSA-qualified medical plan and meet all other eligibility requirements.
You probably can’t have both an HSA and an FSA. If you expect to have high medical costs throughout the year or want to maximize contributions to your HSA while minimizing your withdrawals, using a limited-purpose FSA for expected vision and dental expenses could be a smart choice.
You can contribute to HSA and FSA in the same year. First of all, if the FSA is a dependent care FSA, you can definitely have it in conjunction with HSA. Second, if your health care FSA and HSA don’t overlap, you can contribute to both in the same year.