Financial planning probably isn’t the most fun you’ll have over the holidays. But since some accounts and insurance plans expire at the end of the year, it’s the season to make sure you don’t leave money on the table.
Two common sources of financial confusion are flexible spending accounts (FSAs) and health savings accounts (HSAs). These accounts can save you money on many health-related expenses incurred during the calendar year. However, to get the most out of these plans, it’s important to understand how they work, especially since many FSAs are about to expire.
Here’s what you need to know about FSAs and HSAs.
What is the difference between FSAs and HSAs?
FSAs and HSAs are savings accounts that allow people to set aside pre-tax funds for health-related expenses. To spend these accounts, you’ll usually be issued a debit card to pay for expenses directly; otherwise, you should keep your receipts and submit them later for reimbursement. The IRS also requires that you keep track of what you buy, so keep your receipts.
However, there are several important distinctions between these two accounts.
For one, while an FSA is independent of your insurance plan, HSAs are only open to people with high-deductible health plans, which in 2023 will mean a deductible of at least $1,500 for individual coverage and $3,000 for a family, says Susannah Snider, certified financial planner and financial education editor at SmartAsset, a company that provides personal finance tools.
Another big difference is that FSAs have time limits, at which point people have to spend all the money in the account. HSAs, on the other hand, accumulate over time, do not expire, and you can choose to invest them. If you change jobs, you can take these funds with you (but you cannot continue contributing to the same account).
“You can keep building these HSAs for years, as long as you don’t need funds,” says Silvia Tergas, financial planner at Prudential’s Mid-Atlantic Financial Group. “Think about this being the pool of funds you draw on in retirement for medical expenses, for example.”
When does FSA money expire?
FSA deadlines are at the end of the calendar year or other predetermined benefit period. Check with your employer for the terms of your account.
What is the “use it or lose it” rule?
All FSA money must be used before the end of the year. However, some employers offer “grace periods” or extensions during which employees can spend the rest of the funds. These grace periods generally last 2.5 months. Some employers allow a small portion of funds to be rolled over, Tergas says.
Tergas recommends keeping control of your balance throughout the year. “I see people leaving money on the table, and maybe not even using those dollars and not really realizing they’re leaving.”
Until then, this rule does not apply to HSAs. “HSAs are not ‘use it or lose it’ accounts like flexible spending accounts. If you don’t spend all of the money you contributed to an HSA, it will ‘carry over’ or stay in the account from year to year,” says Sofia Figueroa, Certified Financial Planner at Ellevest.
What purchases can you make with FSAs and HSAs?
Many products are eligible for purchase under FSAs and HSAs, including some that might surprise you. Sunscreen, tampons, bottles, contact solution, hearing aids (including new over-the-counter devices) and glasses are all eligible. Some websites have created pages for FSA and HSA eligible products, including Amazon and Walmart; there is even an outlet that specializes in these accounts, known as the HSA Store.
Accounts can also cover healthcare bills, including those from doctors’ offices and hospitals. However, some healthcare expenses don’t apply, such as some cosmetic procedures, and accounts can’t cover bills from before the account was created, Snider says.
What should you do if you forgot to spend your FSA during the year?
There’s still time to review your medical bills and submit them for reimbursement, or schedule a doctor’s appointment for December that you may have postponed, Snider says. As long as these expenses were incurred in 2022 and are eligible, your FSA should cover them.
Many products that you probably use all the time are also available through FSA. However, be careful not to buy too many of the same products, as the IRS does not allow the use of FSAs for storage. (The IRS does not define how many products qualify as storage, although it does state that the accounts are for medical care used in the current year, not in a future year.) your request was rejected,” Snider says.
What’s the smartest way to spend HSA accounts?
One option is to keep the funds in your HSA and invest some of them. Since HSAs can continue to grow, can be invested, and don’t expire, they can become a valuable asset, says Tergas. These funds have a “triple tax advantage,” she says: “pre-tax contributions, tax-free growth and tax-free withdrawals, as long as those withdrawals are used to pay for health care expenses.”
However, Figueroa points out that HSAs may not be the best options for some people, especially because they come with high-deductible health plans, which can lead to expensive deductibles. “If you or your family typically incur substantial medical expenses each year, you might be better off choosing a different health plan and maximizing your savings through other vehicles like 401(k), IRAs, and brokerage accounts,” she said.
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