Most people talk about the “free money” that you tend to get from your employer when it comes to your 401K/403B Match, but not too many talk about the savings account that they (could) offer you that allows you to pocket money for your health and wellness spending throughout the year (and beyond)!
Health expenses can be unpredictable and costly, but there are tools to help manage these costs. Two common options are Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA). You’ve been seeing content, commentary, and columns that are talking about using them for annual sales like Sephora, etc along with how amazing they are, but what’s the full rundown? Let’s break down what they are, how to use them, and some tips for managing your health expenses effectively.
What Are FSAs And HSAs?
Both FSAs and HSAs are special accounts that let you set aside money to pay for eligible medical expenses. Think of them as your personal healthcare savings accounts.
FSA (Flexible Spending Account): This is a fund offered by your employer where you can contribute pre-tax dollars to cover out-of-pocket medical expenses. It's like getting a little extra cash each paycheck to put towards things like doctor visits, prescriptions, and even dental work.
HSA (Health Savings Account): Similar to an FSA, but with some key differences. You own an HSA, and the money grows tax-free. You can use it for current medical expenses or save it for the future, like retirement. To open an HSA, you typically need a high-deductible health plan.
While you have access to either or any depends somewhat on your employer's benefits package. Most offer FSA, and a couple offer HSA. But if you don’t have either within your benefits, we will see what your options are (don’t financial planners love giving options).
Choosing the Right Account: FSA or HSA?
If you have the option of both, comparing helps a bit. Deciding between an FSA and an HSA depends on your situation.
FSA: If you have predictable medical expenses throughout the year and want to maximize your tax savings, an FSA might be a good fit.
HSA: If you want a long-term savings option for healthcare costs and have a high-deductible health plan, an HSA is the way to go.
Planning for Expenses: FSA or HSA
To determine which account to use, consider your health expenses for the year. Here’s a quick step-by-step plan:
Estimate your health and expenses: If you’re using your FSA or HSA for actual health expenses (eye exams/contacts/glasses, surgery, etc), take a snapshot to see what you would use it for. Look back at your previous year's medical bills/bank statements to get a sense of how much you might spend.
Set a budget: Decide how much you want to contribute to your FSA or HSA based on your estimated expenses. Align your budget with how much you can contribute - this would have you looking at your budget to determine what will not tip your money scale.
Adjust your monthly budget: This will allow you to know how your contributions will reflect in your check. Deduct your FSA or HSA contributions from your monthly income to ensure you’re not overspending.
Track your spending: Keep receipts of all eligible medical expenses to submit for reimbursement. For FSA be mindful of the date for your funds to “run” out due to them mostly expiring at the end of the year.
Understand what qualifies: Not all medical expenses are eligible. Check with your plan administrator to see what's covered. Also, be mindful of if anything changes from year to year with what’s eligible for spending.
Choose the right account: An FSA might be best for predictable annual expenses if your employer offers both. An HSA is great if you have a high-deductible plan and want to save for the future.
Tracking Spending And Qualifying Expenses
Use a Tracking App: Many FSAs and HSAs come with apps that help you track your spending and see what expenses qualify.
Save Your Receipts: Keep all receipts for eligible expenses. This will make reimbursement easier and ensure you have proof of your spending.
Review Your Account Statements: Regularly check your FSA or HSA statements to monitor your balance and spending.
Option A: 3rd Party HSA
What if your employer doesn’t offer an HSA?! Did you know that you, can open one with institutions like Lively, Bank of America, or Fidelity? Here’s how:
Be mindful of your current insurance status:
A. Be enrolled in a High Deductible Health Plan (HDHP): Ensure your health insurance plan qualifies as an HDHP. If this doesn’t apply to you, check Option B.
B. Meet other eligibility requirements: You can't be covered by Medicare, Medicaid, or TRICARE, and you can't be claimed as a dependent on someone else's tax return.
Research Providers: Look for HSA providers that offer low fees and good investment options.
Provide necessary information: You'll typically need personal information, your HDHP details, and your bank account information.
Make initial contributions: You can contribute to your HSA up to the annual limit. Also, check to see if you could transfer an old HSA to this one.
*Compare fees: Look for providers with low or no account fees.
Option B: HYSA/Sinking Fund
So if you don’t have access to a FSA/HSA, but want to see your money grow to be able to fund your health and wellness expenses or experiences? Did you know that you could create a sinking fund within your HYSA (like Ally) for health expenses? Here’s how:
Open A High-Yield Savings Account (HYSA): Look for an HYSA with a good interest rate. My favorites are Marcus by Goldman Sachs and Ally.
Set Monthly Contributions: Decide how much to save each month based on your estimated health expenses and experiences based on your past historical spending, budgeting, and timespan for your spending.
Use For Health Expenses: Use this fund to cover out-of-pocket health costs throughout the year.
I spoke about using the 3rd party HSA platforms and planning for how much to save in your sinking fund/HYSA here!
How To Find Out What's FSA And HSA Approved
Determining what items qualify for FSA or HSA spending can be tricky. Here's a general guide:
Check Your Plan Documents
Your plan is the ultimate authority: Your FSA or HSA plan document outlines exactly what expenses are covered.
Look for specific details: Check for lists of eligible medical expenses, services, and products.
Consult Your Plan Administrator
Direct questions: Your plan administrator can provide specific information about what's covered under your plan.
Ask about changes: Rules can change, so it's essential to stay updated; do this every Open Enrollment.
Utilize Online Resources
Retailer websites: Many stores offer tools to filter products by FSA or HSA eligibility.
HSA/FSA-focused websites: Here’s the website for both the FSA and the HSA stores (Rakuten works, too).
Google: A search for FSA-approved items and HSA-approved items. Some stores should pop up: Sephora and Amazon are just some of the many.
Common FSA/HSA Eligible Items
While this isn't exhaustive, here are some common items:
Prescription medications
Over-the-counter medications
CARES Act Adds OTC Items to Eligible Expenses List - Further Learning Site
Dental care
Vision care (glasses, contacts, exams)
Medical equipment (crutches, walkers)
Certain medical supplies (bandages, thermometers)
Even if an item is generally considered eligible, specific rules may vary by plan. Always consult your plan documents or administrator for accurate information.
The Energy Of An IRA, Just Healthy: Investing With Your HSA -
Another thing that people don’t notice is that your HSA can build you an income stream for later due to the fact you can invest in the stock market. HSA-based funds can be invested in the stock market, allowing your savings to grow over time. Here’s a simple way to start:
Understanding your Cash-to-Carry Ratio: This is for any type of investment account. But you need to measure how much would be allocated/for your health purchases and how much would be invested in the stock market.
Choose investment options: Most HSA providers offer mutual funds or ETFs as investment options. I would look into funds that are different than your IRA, Retirement, etc. This would allow your account to grow over time.
Monitor your investments: Regularly review your investments to ensure they align with your financial goals.
Old HSA? Check out this platform to convert old funds over into other accounts like your current HSA or even IRA.
So what if you leave your company, you never know how things like your benefits could go or flow. Leaving your company can impact your FSA and HSA in different ways. Here’s what you need to know about each:
If you have an FSA and leave -
Use-It-or-Lose-It Rule:
FSAs are typically subject to the "use-it-or-lose-it" rule, meaning you need to use the funds by the end of the plan year. Some employers offer a grace period or allow a limited carryover of unused funds to the next year, but this is not guaranteed.
When Leaving Your Job:
Unspent Funds: Generally, if you leave your job, any unspent funds in your FSA are forfeited unless you have eligible expenses incurred before your termination date.
COBRA: You may be able to continue your FSA under COBRA (Consolidated Omnibus Budget Reconciliation Act), which allows you to keep your health benefits temporarily after leaving your job, but you'll have to pay the full cost of the coverage.
If you have an HSA and leave -
What Could Happen:
Unlike an FSA, an HSA is your account, and the funds are yours to keep even if you leave your job. HSAs are portable, meaning they move with you when you change employers or leave the workforce. I would ask if you can convert it, like with this platform.
When Leaving Your Job:
HSA Funds: You can continue to use the funds for eligible medical expenses, regardless of your employment status. Also look to see if you have any old HSA accounts sitting somewhere (or old 401K/IRAs), here.
Future Contributions: To contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP). If your new employer offers an HDHP, you can continue making contributions. If not, you cannot contribute further but can still use the existing funds.
Account Maintenance: You might consider transferring your HSA to a different financial institution if you find one with lower fees or better investment options.
Action Steps When Leaving Your Job:
Review Your FSA: Check your FSA balance and submit any eligible expenses for reimbursement before your termination date. Contact your HR department to understand any grace periods or carryover options.
Understand COBRA: If you have significant funds left in your FSA and anticipate ongoing eligible expenses, consider continuing your FSA under COBRA. Evaluate the costs and benefits before deciding.
Manage Your HSA: Ensure you know the details of your HSA provider. If you prefer a different provider, initiate a transfer. Continue using your HSA for eligible expenses and monitor your investments.
New Employer Plans: When you start a new job, review the health benefits offered, especially if they include an HDHP and HSA options. Adjust your financial planning accordingly to align with your new benefits package.
A Brief Case Study: Planning FSA Spending
I recently had a conversation with a Warby Parker employee who shared how she plans her FSA spending while I was getting a new pair of glasses. She assesses her yearly health needs, like getting her eyes examined and purchasing glasses. By planning these expenses, she ensures she uses her FSA funds effectively and doesn’t leave money on the table. This kind of proactive planning can help you maximize your benefits and reduce out-of-pocket costs. I love getting real examples from people who don’t know what I do for a living! :)
By understanding FSAs and HSAs and incorporating these tips into your financial planning, you can better manage your health expenses and save money in the process. If you need additional help navigating your FSA or HSA, or if you have questions about planning your health expenses, feel free to set up a session with me. I'm here to assist you make the most of your benefits and achieve your financial goals.
