Does your employer or health plan offer a health care flexible spending account (FSA) or a health savings account (HSA)? If you’re unsure, now’s the time to check. Fall is a common time for employers and health plans to host their annual open enrollment period — it’s also when you can enroll in or change your health coverage. Both FSAs and HSAs are important benefits that can save you money on your health costs, simply because they are tax-free.
How “tax-free” money works
“Tax-free money is a big deal,” says Ben Aragon, manager of product development at Sharp Health Plan. “These are funds that you can set aside before taxes are calculated, and they don’t count toward your adjusted gross income at the end of the year.”
With an FSA, your employer sets up and owns your account, but you contribute tax-free (also called pre-tax) money to it and use it to pay for qualified health expenses during your coverage year. For example, you can purchase eyeglasses, over-the-counter drugs and other qualified medical expenses using tax-free funds from your health care FSA.
With an HSA, when you open an account — whether through your employer or your health plan — you own it, and it follows you everywhere. It’s like a retirement account, exclusively for your health expenses. Plus, HSAs are tax-free in three ways: the money you contribute to your HSA is tax-free, the interest you earn in your HSA is tax-free, and the HSA money you use to pay for qualified medical expenses is tax-free.
So should I use an FSA or HSA?
The short answer: take advantage of what’s available for your situation.
If your employer offers health care FSA benefits, you should absolutely open an FSA. In fact, most large-scale employers offer FSA benefits, but 75% of employees who are eligible for the benefit don’t use it. For many employees, it’s unclear where to start.
“The first step is to find out how much you spent on your health expenses last year, and think about your short-term health needs,” says Aragon. “For example, if you know you need new glasses soon, plan to cover the costs of an eye exam and eyewear through your contributions.”
If your employer or health plan offers an HSA option, read the fine print to see if it’s right for you. To qualify for an HSA, you need to be enrolled in a high-deductible health plan. High-deductible health plans have lower monthly premiums and higher deductibles (the amount you pay for health care costs before your insurance kicks in). This type of plan typically makes more sense for those who are healthy and don’t visit the doctor often.
What else should I know about FSAs and HSAs?
With an FSA, you should plan to use every dollar during your coverage year — the money doesn’t roll over to the next year. That’s why sometimes FSAs are described as “use it or lose it” money.
“Luckily, many employers set a two-and-a-half-month grace period to give you more time to use your FSA funds,” explains Aragon. “Let’s say your plan year ends March 31. With a grace period, you could actually have until June 15 to use up the money in your FSA.”
The chart below lists additional differences between FSAs and HSAs:
|Flexible Spending Account (FSA)||Health Savings Account (HSA)|
|Who contributes money to the account?|
|What's required to open an account?|
|Does the money in the account expire?|
|What happens if you change employers?|
“If you’re still on the fence about it, do a little research ahead of time,” adds Aragon. “Find out what products and services count as ‘qualified medical expenses.’ You might be surprised to see how long the list is.”
No matter what your personal situation is, talk to your employer, human resources representative or your health plan to learn how to get the most out of your health benefits.