Saving for Health & Medical Expenses: Health Flexible Spending Accounts and Health Savings Accounts (FS-1019)

What is it?

A Health Flexible Spending Account (Health FSA) allows you to use pre-tax dollars and get reimbursed for qualified medical expenses. Health FSAs need to be part of your employer’s benefits plan package; you cannot open one as an individual consumer. The money you choose to save is taken from your paycheck and placed in an account managed by a third-party agency. The IRS sets new limits each year so you’ll need to check guidelines annually.

Your employer decides how to manage unspent money by the end of the year. There are two ways the IRS allows unspent money to be used. First, you can be given up to 2 ½ extra months to use the money in your Health FSA account. Second, you may be able to carry over up to 20% of the maximum annual contribution into the next year. In 2024, this amount will be $610. Your employer can offer one but not both options and is not required to offer either option. For more information on your plan, contact your employer’s benefits office.

At the end of the plan year, you may lose any money left over in your Health FSA. So it's important to plan carefully and not put more money in your Health FSA than you think you'll spend within a year on expenses such as medical care, drugs, and other allowed health care costs.

How do I Enroll in a Health FSA?

Health FSAs are offered by employers, often during open enrollment. If offered, you can sign up for a Health FSA during this period. For plan details, talk to your employer or visit your employer’s benefits office.

What is it?

A Health Savings Account (HSA) is a medical savings account available to you if you have a HSA-qualified, high-deductible health insurance plan (HDHP). The best way to determine if your plan qualifies is to ask your benefits office or insurance provider. If the plan is HDHP, you are able to open an HSA. This account allows you to save pre-tax dollars for qualified medical expenses. This provides the same tax reduction benefits as Health FSAs.

Contributions can be made by you or your employer, but you are the account owner.

With HSAs you can build savings to help pay for future health care costs and earn interest on your contributions. The IRS limits the amount you can save each year. Don’t worry; any money in the HSA that you don’t spend carries over to the next year. You don't lose it.

If you no longer have HSA-eligible insurance coverage, you will lose the ability to deposit further funds, but funds already in the HSA remain available for use.
Because you are using pre-tax dollars, any withdrawals for expenses that are not qualified will be taxed as income and a 20% penalty will be charged. This penalty is waived if you’re over age 65.¹

How do I set up an HSA?

If your health insurance plan meets the rules for a Health Savings Account, you set up the account with a trustee. A qualified HSA trustee can be a bank, an insurance company, or any organization already approved by the IRS to be an HSA trustee. This means you don’t have to use your health insurance company to set up the HSA.

Your money can be invested to earn interest over time for your future use. Manage these funds with the same care that you manage other bank accounts. As you choose an institution to hold your HSA, consider any fees, related interest rates, and how easy it will be to deposit and withdraw money.² To show the differences between the two plans, Table 1 highlights some of the key points of each.

How can you use these accounts?

Both the Health FSA and the HSA can be used for qualified medical expenses not covered by your insurance. Some eligible expenses are: copays, deductibles, vision expenses, dental procedures, and some medical devices, such as a blood sugar meter for diabetics, canes, and wheelchairs. For a full list of allowed services, go to https://www.irs.gov/ publications/p969

How do I figure out how much to contribute?

Many people would like to start an account but don’t know how much to put in. Because the accounts are used for out-of-pocket expenses, a good place to start is to look at how much you spent on these expenses in prior years. You can get this information by saving receipts, looking at your explanation of benefits, or calling your doctors’ offices and pharmacy to get a print out of all visits and the amount you paid for the year.

It is important to calculate how much you may need to contribute. A list is shown on the next page to help you summarize what is called “Out-of-Pocket Costs” or expenses you pay. Fill in the total amount spent for each, calculate the total amount of out-of-pocket costs and then divide by the number of paychecks you receive each year to determine how much to have deducted each pay period. Remember you can only save up to the maximum allowed by your plan. To learn more about out-of-pocket yearly increases, read the factsheet: Helping You Make a “Good Guess” for Out-of-Pocket Health Costs, found on extension.umd.edu/insure

How do I get the money from the account?

Many times, the Health FSA coordinating agency or HSA trustee will issue a debit card or check book. A debit card or check is used to pay at the time of service. Others may have you pay cash and then submit receipts for reimbursement. With either method, documentation is needed to show it was a qualified medical expense.

Documentation usually includes:

• Date of service/purchase
• Amount spent
• Receipt of service
• Description of service/diagnosis code
• Prescription from doctor for some over-the-counter medicines

The claim will be reviewed and if it is a qualified expense, the amount requested will be approved.

Both Health FSAs and HSAs provide an opportunity to save on qualified health care expenses. This can bring a tax savings and provides a nice incentive to set money aside. Talking with your employer’s benefits office or your financial advisor can help you learn which type of account is available to you and what makes the best sense for your financial future.

For more information and resources related to your health and health insurance, please visit http://extension.umd.edu/insure.

1.  IRS Publication 502, Medical and Dental Expenses. Retrieved June, 1, 2014 from https://www.irs.gov/forms-pubs/about-publication-502.
2. IRS Publication 969. Retrieved June 1, 2014 from https://www.irs.gov/publications/p969