The Evidence on HSAs and FSAs, Without the Hype

Key takeaways

• HSA eligibility: requires an HSA-eligible high-deductible health plan
• HSA money: is yours, rolls over every year and stays with you if you change jobs
• Most useful single change: Estimate predictable costs, such as glasses, prescriptions and copays, before choosing an FSA amount.
• Commonest mistake: Putting more into an FSA than you are likely to spend.
• See a doctor if any of the signs under "When to speak to a doctor" below apply to you.

What it is

Tax-advantaged accounts that let you set aside money for medical costs: a Health Savings Account (HSA) or a Flexible Spending Account (FSA). It sits within Health Insurance. Here are the numbers, taken from the guidance cited at the end.

The numbers, in one place

What helps

What follows is the practical part: the things guidance actually asks of you.

• Estimate predictable costs, such as glasses, prescriptions and copays, before choosing an FSA amount
• Keep receipts for every HSA or FSA purchase
• Check your FSA deadline and grace period before the plan year ends
• Ask a tax professional how an HSA fits your situation if you are near Medicare age

What to avoid

A few of these are widely believed. That is precisely why they are here.

• Putting more into an FSA than you are likely to spend
• Using HSA money for non-medical costs, which can trigger taxes and penalties
• Contributing to an HSA after enrolling in Medicare

In depth

Health Savings Accounts and Flexible Spending Accounts both let you pay for eligible medical expenses with money that is not taxed, which can lower the real cost of care. If you pay a copay with tax-free money, you effectively get a discount equal to the tax you would otherwise have paid on that money. Both accounts can be used for deductibles, copays, coinsurance, prescriptions and many other medical costs, such as dental work and eyeglasses.

The accounts are built very differently. An HSA is an individual account you own, paired with an HSA-eligible high-deductible health plan. Contributions can come from you, your employer or both, the money rolls over year after year, and in many accounts it can be invested. An FSA is set up by an employer, works on a plan-year basis and generally must be spent within the year, though some employers allow a short grace period or a limited carryover, but not both.

HSAs have a tax benefit at three points: contributions are tax-deductible or made pre-tax through payroll, investment growth is not taxed, and withdrawals for qualified medical expenses are tax-free. That makes them useful both for current costs and as long-term savings for health costs in retirement. FSAs are simpler and available with many types of plans, but the use-it-or-lose-it rule means you need to estimate your spending carefully.

Signs and symptoms

• Your employer offers an HSA or FSA during open enrollment
• You have a high-deductible plan and large out-of-pocket costs
• You have predictable yearly expenses such as glasses, braces or regular prescriptions
• You have FSA money left as the plan year ends
• You are approaching Medicare eligibility while contributing to an HSA

Causes and risk factors

• Being enrolled in an HSA-eligible high-deductible health plan
• Having an employer that offers an FSA
• Expected medical, dental or vision costs in the coming year
• Wanting to save for health costs in retirement
• A change in health or family size affecting expected costs

How it is checked

To work out which account you can use, start with your health plan. If it is an HSA-eligible high-deductible plan, you can open an HSA, either through your employer or independently. You generally cannot contribute to an HSA if you also have other coverage that is not a high-deductible plan, such as a general-purpose FSA or Medicare. An employer may offer a limited-purpose FSA, which covers only dental and vision, alongside an HSA.

Check the IRS limits for the year, which change annually, and any employer contributions, which count toward the HSA limit. For an FSA, review the plan rules: the deadline to spend, whether there is a grace period or carryover, and how to submit claims. Keep receipts for every purchase, since you may need to show that expenses were eligible.

Treatment and support options

Choosing how much to put in an FSA

Look back at last year's out-of-pocket costs and think ahead: regular prescriptions, copays, dental work, glasses or contacts, therapy or planned procedures. Aim for an amount you are confident you will spend. A useful feature is that the full annual amount you elect for a health FSA is usually available from the start of the plan year, even though you pay it in over time.

Using an HSA as long-term savings

If you can afford to pay some current costs from regular income, you can leave HSA money to grow, potentially investing it. Keep receipts, since you can generally reimburse yourself later for qualified expenses incurred after the HSA was opened. After age 65, you can withdraw for non-medical purposes without the penalty, though income tax applies, while medical withdrawals remain tax-free.

Knowing what counts as eligible

Eligible expenses include deductibles, copays, coinsurance, prescriptions, many over-the-counter medicines, menstrual care products, dental and vision care, and certain medical equipment. Cosmetic procedures and general health items usually are not eligible. Your account provider may publish a list; ask before buying if unsure.

Planning around Medicare

Once you enroll in any part of Medicare, you can no longer contribute to an HSA, though you can still use the money. Because Medicare Part A coverage can be backdated up to six months if you enroll after 65, people often stop HSA contributions six months before enrolling to avoid excess contributions. Ask a tax professional or your benefits office how to time this.

Prevention

• Keep receipts and EOBs for every account purchase
• Check your FSA deadline and spend remaining money on eligible items in time
• Avoid using HSA money for non-medical expenses before 65
• Review contribution limits and your employer's contribution each year
• Stop HSA contributions in good time before Medicare starts

Day to day

Using these accounts well mostly means keeping good records. Use the account debit card for eligible expenses when possible, and keep receipts in a folder or app. If your account asks for documentation, respond quickly, since cards can be suspended until claims are verified. For an HSA, consider keeping a spreadsheet of expenses you paid out of pocket, so you can reimburse yourself later.

Review your choices each year. If you consistently have FSA money left over, reduce the amount next year. If you have an HSA and can afford to, consider increasing contributions, especially if you expect high costs. If your health or family situation changes, such as pregnancy or a new diagnosis, revisit both your plan and account choices during open enrollment.

For specific groups

People nearing Medicare

You cannot contribute to an HSA once you enroll in Medicare, and late contributions can create tax problems. People who start Social Security benefits are usually automatically enrolled in Part A, which ends HSA eligibility. Plan ahead with your benefits office or a tax professional.

Families

HSA and FSA money can be used for eligible expenses for your spouse and tax dependents. Family HSA contribution limits are higher than self-only limits. Keep track of who the expense was for in your records.

People with chronic conditions

If you know you will spend a lot each year, an FSA can provide a reliable tax saving. With an HSA-eligible plan, check the deductible and out-of-pocket maximum carefully, and make sure you can afford them if your account balance is low.

Questions to ask your doctor

• Can you give me an estimate of my expected costs for next year?
• Will I need any procedures, equipment or therapy that I should budget for?
• Is there a lower-cost generic or alternative I could use?
• Can you provide a letter of medical necessity for an item that needs one?
• Which over-the-counter products do you recommend for my condition?
• Can my care be scheduled so costs fall within my FSA plan year?

More questions, answered

Can I have both an HSA and an FSA?

Generally not a standard FSA, because it counts as other coverage. You can usually pair an HSA with a limited-purpose FSA that covers only dental and vision expenses. Check what your employer offers.

What happens to my HSA if I change jobs?

Your HSA belongs to you, so the money stays with you. You can keep it with the same provider or move it to another one. You can continue to use it for qualified medical expenses even if you are no longer in an HSA-eligible plan.

What happens to my FSA if I leave my job?

You usually lose access to unspent FSA money when you leave, unless you continue it through COBRA. Some people spend remaining funds on eligible items before their last day. Check your plan's rules.

What if I use HSA money for something that is not eligible?

Before 65, non-medical withdrawals are subject to income tax and an additional 20 percent penalty. If it was a mistake, some HSA providers allow you to return the money. Keep records and ask your provider.

Can I use these accounts for over-the-counter medicines?

Yes. Many over-the-counter medicines and menstrual care products are eligible without a prescription. Some items, such as certain supplements, may need a letter of medical necessity. Check your account provider's rules.

Do HSA balances expire?

No. HSA money rolls over every year and remains yours. There is no deadline to spend it, which is a key difference from an FSA.

Related topics

• What the Guidance Really Says About Dual Eligibility (Medicare and Medicaid)
• What the Guidance Really Says About Benefits and Financial Support (Long-Term Conditions)
• What the Guidance Really Says About Caregivers and Work (Carers)
• The Evidence on Travel Insurance and Healthcare Abroad, Without the Hype (Travel Health)

Where to go next

• Myths About HSAs and FSAs, Checked Against the Guidance
• Starting Out With HSAs and FSAs
• HSAs and FSAs — the reference entry
• Health Insurance: The Complete Guide
• Surprise Medical Bills: Sorting the Evidence From the Noise
• Lowering Prescription Costs: What Published Guidance Supports

When to speak to a doctor

Account balances should never decide whether you get urgent care; call 911 for an emergency. Talk with your doctor about lower-cost options if costs are stopping you from following a treatment plan.

Where this comes from

• HealthCare.gov — Health Savings Account (HSA)
• HealthCare.gov — Flexible Spending Account (FSA)

How this page was put together

Every figure, recommendation and warning above is taken from the guidance named in Where this comes from. Nothing on this page is inferred, summarized or generalized beyond what those bodies publish: where they give a number, it is their number, and where they are silent, so are we. Pages are rebuilt whenever the underlying record changes. Sign-off by a named clinician, where it has happened, is shown at the top of the page along with the date.

Medical disclaimer

This article is general information, not medical advice. It cannot account for your own history, medication or circumstances. Always speak to your doctor, pharmacist or another qualified health professional before making changes that affect your treatment, and never delay seeking medical advice because of something you have read here. In an emergency, call 911.