This guide to flexible spending accounts will help you decide if they are the right fit for you.
A Flexible Spending Account (FSA) is an arrangement through your employer that lets you pay for many out-of-pocket expenses with tax-free dollars. Allowed expenses include insurance deductibles and copays for medical, dental and vision plans, prescription drugs, and medical devices, among others.
You decide how much to put in an FSA, up to a limit set by your employer, and you are not taxed on this money. You will lose any money left in the account at the end of the year, known as the Use-It-or-Lose-It clause, unless your employer offers one of two options:
- You get 2.5 more months to spend the leftover money
- You can carry over up to $500 to spend in the next year
Like HSAs, there are several advantages for FSAs:
- Contributions, made by you and your employer are tax free
- Payments from your FSA for qualified medical expenses are tax free
But:
- Unlike HSAs, you can withdraw funds from the account to pay for qualified medical expenses up to the amount you elect, even if you have not yet placed the funds in the account.
- Unlike HSAs, you must elect the amount of funds you would like to place in the account at the beginning of the year, which will be deposited through payroll deduction periodically by your employer. You cannot change your election or revoke your election unless you experience a change in employment or family status as allowed by the plan.
Frequently Asked Questions:
My employer offers a traditional Health FSA. Does my enrollment in this plan affect my HSA eligibility?
Yes. When you participate in an FSA, you have an additional medical plan, according to IRS regulations. Unless ALL of your medical coverage is HSA-qualified you are not eligible to open and contribute to an HSA. So even if your primary plan is an HSA-qualified medical plan, and meet all other eligibility requirements, you may not contribute to an HSA during any month in which you participate in an FSA.
But what if I spend my entire balance before the year is over?
You remain covered by your Health FSA for the entire year, even if you spend your entire election before the year is over, so you would remain ineligible to contribute to an HSA until the following year.
What about an FSA with a grace period or carryover?
If your employer’s FSA has a grace period provision, which allows you to reimburse qualified expenses for up to 2.5 months after the 12 month plan year, in order to be HSA eligible the first day after the 12 month plan year, you MUST spend your entire election and file for all reimbursements before the last day of the plan year. If your employer’s Health FSA allows a carryover of up $500, you must either spend the entire election before the last day of the plan year, or rollover the funds into a Limited Purpose FSA, otherwise you could be locked out of HSA-eligibility for another full year, as this feature establishes a new plan for the entire following year.
What if I want to enroll in an HSA-eligible plan during my employer’s open enrollment, but our Health FSA has a different plan year?
So, your employer has their health plan enrollment July 1, but the Health FSA runs on a calendar year—are you HSA-eligible? No. You remain enrolled in the Health FSA until the end of the plan year, at which time, if you enrolled in an HSA-qualified health plan on July 1st and you have spent the balance in the FSA, you would be eligible to open and contribute to an HSA.
Are there any FSA plan designs that would allow me to open and contribute to an HSA?
Yes, you can participate in a Dependent Care FSA, or a Limited Purpose FSA (for dental and vision services) and still be HSA-eligible.
My spouse is enrolled in THEIR EMPLOYER’s Health FSA program. How does that affect my HSA eligibility?
You are no longer eligible to open or contribute to a Health Savings account if your spouse is enrolled in a Health FSA, unless their plan specifically excludes spouse, which is rare. Under federal tax regulation, spouses and children under the age of 26 are automatically enrolled in a subscriber’s FSA and can receive reimbursement for qualified medical expenses.
You can still enroll in the HSA-qualified health plan offered by your employer, but you will not be able to open or contribute to an HSA until you AND your spouse are no longer covered under an FSA.
But what if we never claim reimbursement for medical or prescription expenses under my spouse’s FSA?
Sorry! If the health FSA plan document allows for reimbursement of medical services and prescription drugs, you are still ineligible even if you don’t seek reimbursement from the FSA for those services.
I would like to enroll in my employer’s HSA program during open enrollment now, but my spouse won’t be able to change their election until THEIR employer’s open enrollment in five months. What are my options?
- If your spouse leaves their job and disenrolls from the Health FSA, you then become immediately eligible to open and contribute to an HSA.
- You can enroll in your employer’s HSA-qualified health plan for the reduced premium now. You can both reimburse qualified expenses from the FSA until the end of your spouse’s plan year, at which time, if they do NOT re-enroll, you can start contributing to an HSA.
- You can enroll in your employer’s HSA program next year, after making sure your spouse doesn’t reenroll in the Health FSA. You then won’t have access to a tax advantaged fund for qualified medical expenses until you enroll in the HSA-qualified plan at the next open enrollment.
Looking for more open enrollment employee resources? Download our Open Enrollment Employee Resource Guide. It shares easy-to-understand insurance guidance that will help employees ace open enrollment year.
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