What you need to know about your HSA & FSA
First thing is that your FSA money needs to be used by the end of the year! If you have a FSA account, that money does not roll over to the next year, it's a use it or lose it.
And by the way...do you know what happens to your unused FSA funds? In case you didn’t know..they go back to your employer! Your employer has the option to split the unused funds with employees or keep those funds to offset administrative costs. Unfortunately, under IRS rules, your employer isn’t allowed to return them directly back to you.
So if you don’t want your money going back to your employer...keep listening for ways to use them this month!
Today, I’m going to talk about ways to use this money and also go over the difference between a FSA and HSA.
Let’s start with the FSA. An FSA is a Flexible Spending Account. It’s an account that can be offered through your employer. Unfortunately, it isn’t available for self employed individuals.
The money you contribute to your FSA is pre-tax dollars and can be used on medical expenses for the year.
This is a health benefit that you sign up for during open enrollment. In most cases, this is the only time you can sign up for an FSA. At sign up, you’ll decide how much you want to contribute to the account. Once you decide on the amount and set it, it can’t be changed.
This is a bit restrictive, but the benefit is that once you’ve set that amount, you are able to access that money right away.
For example, let’s say you sign up for the FSA during open enrollment and decide to contribute the IRS max of $2750. In January, you have access to that entire $2750 and can use it right away. If you were to use that entire amount in January, your contributions for the rest of the year would pay that back. In essence, you can go negative on your FSA account, up to the amount that you’ve committed to contribute for the year.
So with the FSA, you set your pre-tax contribution amount for the year during enrollment, up to $2750, and it can’t be adjusted, but you do have access to that entire amount on January 1.
In comparison, the HSA or Health Savings Account offers more flexibility. You are eligible for an HSA if you are covered under a high deductible healthcare plan. A high deductible is considered $1400. In this case, if you are self-employed and are covered under a high deductible plan, you can open an HSA and contribute to it.
The IRS max for an HSA for 2021 is up slightly to $3600 for single and $7200 for a family. And same with the FSA, you are contributing pre-tax dollars.
One thing to note, if you are covered under an employer and they contribute to your HSA also, the employer contribution counts towards your max.
For example, let’s say your employer contributes $600 a year for an individual to your HSA. The IRS limit is $3600 so you are only able to contribute an additional $3000.
The difference with an HSA is this account is yours. It rolls over to the new year, it follows you if you change jobs. You own the account. In some cases your employer will cover the maintenance fees and if you move jobs, that maintenance fee may fall to you. But you can still keep the account open and use the money in it.
To quickly hit the basic points: you can open an HSA if you are covered under a high deductible plan, which means your deductible is at least $1400, you contribute pre-tax dollars and the max is $3600 for single and $7200 for family. This account is yours and you can take it with you.
I want to go over some of the specifics of how an HSA account works.
First, an HSA is tied to your social security number. Which means if you had an HSA at your old job and then start a new job where you enroll in a high deductible plan and open an HSA. If your new employer uses a different HSA provider, you can roll your old HSA to your new HSA.
However, let’s say you start a new job and then switch to your partner’s insurance provider. Now your partner signs up for an HSA. You are not able to roll your HSA to your partners HSA.
HSA’s are also unique in that the expenses you pay for with it, don’t necessarily need to be for covered members. Let me explain.
An HSA is a tax advantaged account, so IRS rules apply to these accounts more than insurance rules, you could say. When using your HSA funds for medical expenses, they can be paying expenses for you, your spouse or any dependents that you can claim on your tax return or children who are claimed on your ex’s return.
So, I’m just going to use my husband and I as an example to help explain this.
We each have our own, separate insurance plans through our own employer. We both have high deductible plans with an HSA. But let’s say I have medical expenses that I can’t fully cover with my own HSA account. Because Scott is my spouse, we can use his HSA to cover my medical expenses even though I’m not covered on his insurance plan.
The IRS doesn’t necessarily care who is covered, but that the tax benefits remain “in the family” you could say.
Another unique feature of the HSA is that you can actually invest the money you have in your HSA. I believe most HSA providers have this option. With this option, you can actually grow your earnings through investing and those earnings grow tax free.
In case you missed that...with an HSA you don’t pay tax on the money you contribute, you don’t pay tax on the money you earn from it or the contributions your employer makes and you also don’t pay tax when you use the funds! An HSA is LOADED with tax benefits.
Now, let’s talk about how you can use an HSA as a retirement tool.
We’ve already talked about the ability to invest your HSA money and receive earnings in that way. When you reach 65, you’re no longer able to contribute to an HSA but there is no age at which you are required to use this money. So unlike a 401K or IRA where you have required minimum distributions, an HSA doesn't have this.
When using your HSA funds, they should be used to pay for medical expenses. If you are under 65 and you use them for anything other than medical costs, you’ll pay taxes plus a 20% penalty. Now, when you’re 65 you are able to use these funds for anything you’d like without penalty. However, any funds not used for medical expenses will be taxed.
So essentially at 65, this account becomes very similar to a 401K or IRA. It’s still best to use this money for medical expenses because you’ll get that extra tax benefit, but you won’t be penalized if you were to need it for something else.
Let’s quickly recap all of that…. An HSA is an account that you own and you take it with you. You contribute pre-tax dollars, your earnings grow tax free and your distributions for medical expenses are also tax free. You can use HSA funds for you, your spouse and qualified dependents. Prior to age 65 using your HSA money for anything besides medical expenses will cost you taxes plus 20%. Once your 65, you’ll only pay taxes on that money. But when you use it to pay medical costs, no matter your age, you pay no tax or penalty.
Okay so lastly and most importantly, I think, what qualifies as medical expenses? This is especially important for your FSA money that you’ll lose as the end of the year.
All doctor visits, procedures, lab work, prescriptions..all of those you can pay with your FSA or HSA. What’s is new is with the Cares Act, you can now use that money to pay for over the counter medications also!
So if you need to use up your FSA and don’t have any appointments or prescriptions to fill, stock up on things like tylenol, cough syrup, allergy medicine. You can also use it for feminine hygiene products included the period cups and period panties like Thinx!
If you are buying these types of things with your FSA or HSA I HIGHLY recommend going to either fsastore.com or hsastore.com
It’s a website with 100% guaranteed covered expenses that you can use your FSA and HSA money on. I don’t know about you, but I worry about making sure I’m buying covered items with my HSA money so I don’t get audited and penalized! So these sites offer stress free shopping!
Check out those sites, don’t let your FSA money go to waste and if you have the option to open an HSA..do it!
