Note: Open enrollment for FSAs takes place at the beginning of new health plan years, typically from mid-November to mid-December.
Health Saving Accounts (HSA) and Flexible Spending Accounts (FSA) are both types of savings accounts that let you set aside money on a pre-tax basis to pay for medical expenses. In both cases, you contribute to them on a pre-tax basis using your gross pay,
And as long as you use the funds to pay for qualified medical expenses, you generally won’t owe taxes on withdrawals. But HSAs and FSAs differ substantially in how they work, who can enroll and what can happen to the amounts you contribute.
Health Saving Accounts
HSA accounts are offered by employers in conjunction with “high-deductible” health plans. Your health plan deductible must be at least $1,500 for single coverage for 2023 or $3,000 for family coverage. Self-employed individuals with high-deductible health plans can also set up HSA accounts.
An HSA is controlled by an individual and can be more flexible than an FSA plan. Withdrawals for non-medical purposes are allowed subject to a penalty and contributions may be rolled over to the next year. The HSA is also a “portable account” so you keep your money even if you switch jobs. However, in most cases, you are not eligible for an HSA if you can be claimed as a dependent by someone else.
In many cases, the employer or self-employed individual will contribute funds into the HSA to cover costs toward the deductible until the health insurance policy takes over the financial burden. Once the account is set up, an employee can contribute additional money to the HSA with a payroll deduction from gross income. The money contributed to an HSA account can be made with pretax dollars, which reduces the amount of income reported for tax purposes. Contributions to HSA plans are subject to annual limits depending on the type of plan. Interest or earnings on the money invested in the account is tax-free.
A withdrawal from an HSA can be used for a broad range of medical expenses, from doctor visits and hospital stays to eyeglasses, contacts, chiropractic care or prescription drugs.
Once enrolled in Medicare, a taxpayer cannot continue contributing to an HSA but can spend the funds tax-free on medical needs, including Medicare premiums and out-of-pocket costs. After age 65, HSA funds can be withdrawn without penalty for other expenses unrelated to healthcare, but the withdrawals will be subject to ordinary income tax.
Flexible Spending Accounts
An FSA is similar to an HSA, but there are a few key differences. For one, self-employed individuals are not eligible. Unlike an HSA, an FSA is employer-owned and less flexible. Non- Qualified Withdrawals are not allowed and contributions must be spent within the tax year and cannot be rolled over to the next year.
In addition, an FSA requires that you declare how much you would like your employer to deduct from your gross pay to fund your FSA in each calendar year. Once that declaration is made, you generally can’t change it.
You can only sign up for an FSA during the annual open enrollment period. Open enrollment takes place at the beginning of new plan years, typically from mid-November to mid-December, but can vary with the plan.
One of the biggest benefits of an FSA is that it can be set up as a Dependent Care FSA (DCFSA) to allow withdrawals for childcare expenses. It is also possible to have a separate, regular FSA to cover medical expenses depending on your company’s plan.
Your CPA can help you navigate the complicated rules of HSAs and FSAs to see which type of account gives you the best tax advantage.
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