So this year for the first time I set up a Healthcare Spending Account when choosing my benefits (actually a Health Care Flexible Spending Account). Pre-tax money is taken out of each paycheck and placed in the account, which can then be used for medical or other healthcare expenses. But the big problem with such accounts as I perceived them was the requirement that the money be spent by year-end or it’s surrendered. That’s the reason I never did this previously.
But as I understand it, you can only spend what’s been contributed to the HSA. So in my case, I have gum surgery in early April so I can only spend what’s in the account to date and the rest of the uninsured cost has to be after-tax money as usual. And even if I’m really careful about spending down the account throughout the year, there will be a small amount put in the account from the last couple of paychecks in December. It seems to me that I would prefer to front-load the account so the first couple of paychecks in the year go entirely to the HSA, which would give me the entire year to spend the money wisely. I get the impression that instead in December people hunt for something they don’t really need in order to use up the last amount.
Is my understanding of Healthcare Spending Accounts correct? If you’ve enrolled in one, how do you use it?
There are FSA = Flexible Spending Account (also called more fully “Health Care Flexible Spending Account” = HCFSA), and HSA = heathcare savings account. Those are two utterly different things with utterly different rules.
You seem to be talking about HCFSAs while using the HSA acronym. That is a recipe for abject confusion. Both for you, for any searches you make, and for any of us answering you.
Your description of the features sounds like you mean an HCFSA = FSA, not an HSA. But your title and your words beyond the features keep saying Healthcare Spending Account = HSA.
ETA: I see you’ve since clarified you are talking about an FSA.
For an HCFSA = FSA:
Yes, you put money in from a fixed payroll deduction each pay period, up to an annual max that changes from year to year and is $3050 in 2023.
At many employers you can spend the full annual amount before you have deposited it. If your employer has that feature you could spend the full $3050 in early January on, say, an expensive ER visit, even though you haven’t put a penny into the account for 2023 yet. Other stingier employers are pay-as-you-go.
At every employer there is a time period where you can submit delayed expenses from the last year for reimbursement. Say you get medical care on 12/31/23 but you don’t get the bill until 01/31/24.You can still submit that bill for care received in 2023 on, say, 2/15/24 and still get reimbursed under your 2023 balance for that expense. Assuming you have 2023 balance left.
in addition to the above provision, at most employers there is a “grace period” next year where you can, say for the first 3 months of 2024, use up any money left over from your 2023 account balance. So if you had a medical expense in Jan or Feb 2024 and still had money left over in your 2023 balance, you could use that money up first, then begin eating into your 2024 money with later expenses. For some employers there is a $ limit on the carryforward. A common number is $500.
Obviously if as you get close to the end of 2023 you see you have a lot of 2023 money left, you should reduce how much you withhold to fund your 2024 account. Both because the 2023 money will pay for some early 2024 expenses, and because you’ve overestimated your total year’s expenses and don’t want to repeat that mistake in 20204.
But yes, after all these grace periods are done, if you still have money left over in your account for last year, it disappears and is given back to your employer. Thank you Congress.
These various provisions work to make the current version of an FSA much more user-friendly than were the very early ones which had people guessing about how to go the pharmacy on the last day of the year and buy a bunch of not-immediately needed supplies to avoid “wasting” any remaining balance.
As to how to use it:
What are the deductibles for your medical insurance? How much do you spend on those, co-pays, and other OOP expenses like OTC meds, first aid stuff, etc.? You can use the sum of that as a reasonable estimate for next year’s expenses and hence how much to put in this year’s FSA.
Then just start spending on medical stuff in the normal course and use the FSA money to pay for everything as much as possible until it’s gone.
And don’t really sweat over-funding the FSA. Assuming a typical marginal tax rate, even if you over-estimate your expenses and put, say, $3,000 in for the year and only spend $2500 of it after all the grace periods, eventually forfeiting $500, well … You just broke even. What you saved on taxes is the same amount as what you forfeited later.
So don’t wildly over-estimate your spending, but don’t sweat the last penny either.
Gaahh, administering Health FSAs (among other things) is what I do for a living, so it’s hard to walk away from this thread. But I must, due to previously-made plans.
@LSLGuy has given you some good information and most of it is accurate but not all. If not corrected by the time I’m available later on, I’ll jump in. But by and large, he’s got it right.
Depends on your age and your family’s health. When my late first wife was ill, we usually zeroed the maxed-out FSA by the third week in January.
That was a one-way bet that always paid off at my marginal tax rate. Zero gambling, pure profit.
@Aspenglow: Please … straighten out whatever I goofed. I’m no pro at this, just an end-user. But I’ve been doing them a lot of years for various employers. What I don’t know for sure is how many of these “gravy” nuances are mandated by law or are just optional features my employer(s) have chosen to opt into and provide to us peons.
I have both HSA and a Flex HSA, the Flex HSA money is available to me on January 1st, before any contributions are made. If I don’t work the entire year for some reason I have to pay back a protion of what I didn’t fund that year.
My HSA money is only available as I pay into it. But it is my understanding that all expenses incurred this year are covered no matter when they occured. I just would not get the money back until it was funded. So if I spent $1300 in Janauary and didn’t have enough funding to cover that until April I could submit the $1300 for reimbursement in April and get it all back.
YMMV.
Flex savings account money must be spent within the calendar year or you lose it. The HSA account money that isn’t used can be rolled over to the next year. And you get whats left over when you retire for retirement medical expenses (or cash out with a tax penalty). It’s a good deal for older folks to do this before retirement IMHO.
One side wanted to come up with a way for the Feds to subsidize OOP medical expenses for ordinary folks. The other side was OK with this as long as it wasn’t very much. And definitely don’t turn this into a tax-advantaged alternate savings vehicle like the IRA was/is. The employer and benefits lobby got involved and said “We don’t want to have to pay to administer this cockamamy invention.”
So the compromise was employers pay to administer it, but get to keep the year end forfeitures, if any, to defray their costs. Meanwhile the Feds eat the cost of the tax subsidy the taxpayers get from the pre-tax deductions. But only up to $3K/year per family here in 2023. Which is more like $750 per person per year in healthcare spending and about $200 per person per year in tax subsidy (= taxes not collected). And was much less ~20 years ago when these things were invented.
A side effect of the use it or lose it feature is that strongly encourages folks, especially lower income and healthier folks to grossly underestimate their FSA deductions, and thereby not get much tax subsidy to avoid the risk of overestimating. Which has the effect of making the program less costly for the Feds. And more regressive.
Pure political sausage. I’m not going to say which side of the aisle favored which provisions, but it’s not a hard story to follow.
Back in the days when I had an FSA, if I had money left at the end of the year, I would always use it to stock up on over the counter stuff–aspirin, cold pills, that kind of thing. Then the law changed, and you couldn’t use FSA funds on OTC medications unless you had a prescription for them.
I believe that during COVID, it changed back and OTC meds are FSA-eligible again, but I’m not sure if that’s still the case, or if so, how long it will last.
I always liked having the FSA. The money went into my account at the beginning of the year, and I had a debit card to access the funds. So whenever I picked up a prescription or had a doctor’s or dentist appointment, I could just swipe the card and not worry about it.
There are two main types of Health FSA plans. One is referred to as a “Grace Period” Plan and one is referred to as a “Rollover Plan.” How end-of-year expenses are handled depends entirely on which type of plan your employer offers, and they are quite different. In my experience, the Rollover Plans are far more popular by about 10-1.
Your very first step should be to determine which of these plans your employer offers!
The Grace Period Plan: Allows you to incur additional expenses from January 1 of the prior Plan Year through March 15 of the current Plan Year and claim them with any funds left over in your prior Plan Year Health FSA, assuming you have funds left to spend. Any funds you don’t spend by the deadline will be forfeited to the employer (more on forfeiture later).
The Rollover Plan: Your expenses must be incurred during the Plan Year for which you are making a claim. Example for 2022, you had to incur the expense on or before December 31, 2022. However, if you have unclaimed funds up to $570 remaining in your Health FSA after the 90-day run-out period (ends March 31 of each year), then those protected funds will automatically roll over into the current Plan Year 2023 for your use with 2023 expenses. Any amount over $570 in your account will be forfeited to your employer. This amount changes each year. For 2023, the Rollover amount is $610.
It is always when the product/service is rendered that controls when you are reimbursed. If you incur the cost in December 2022 but don’t pay for it until January 2023, you can only claim the expense with 2022 funds. Even in a Rollover Plan, we aren’t permitted to use 2023 funds to pay for an expense incurred in 2022 unless 2023 funds are exhausted or if the participant does not actively sign up for 2023. Once the run-out period of March 31st expires, rolled over funds can only be used for expenses in the current Plan Year 2023.
In both cases, you have until March 31 of each year to submit all final claims for reimbursement in the prior Plan Year. You can have either a Grace Period Plan or a Rollover Plan, but not both.
(Some confusion about this arose during 2020, 2021 and 2022 due to special provisions made by Congress because of the pandemic, but those provisions are gone now.)
There is not some nefarious plan to swindle participants out of their funds. The reasoning behind the Use-it-or-Lose-it rule is much more simple.
Suppose you’re going along and have Lasik surgery in February. You use all your funds in your Health FSA up to your annual election for this procedure on February 1st, essentially receiving a “loan” from your employer for the balance not yet paid into your Health FSA. But then you get laid off in March.
The IRS felt it was difficult and problematic for an employer to demand repayment of the “loan,” meaning the unrealized withholdings. Talk about insult to injury on the day you lose your job! So instead, they created the Use-it-or-Lose-it rule as an offset to these losses to the employer. They are referred to as experience gains and losses. The idea is that over time, these gains and losses to the employer even out. In my 30-ish years of administering these plans, that’s about how it goes. Some years the employer comes out on top, others, the employee has a gain.
This is also the reason why employers are required by the rules to reimburse employees at any time during the Plan Year for up to their annual election, irrespective of whether the funds have been paid into the participant’s account. If an employer is reimbursing a Health FSA only up to the amount accrued into the account, then that employer is in violation of the IRS rules governing these plans. Some employers do ignore the rules, though.
One last point: Health FSAs are a bonafide tax savings vehicle. Used properly, they are one of the last real tax breaks you get from the IRS. They reduce your overall annual taxable income and the amount you elect is reimbursed to you pre-tax. The net effect is a savings of between 30-40% of money you would presumably spend on health care anyway. It also means you’d have to leave at least a third of the funds you elected in your account (Grace Period Plan) before you lost one penny more than someone who isn’t participating in these plans at all. With a Rollover Plan, you’d have to be even more careless!
Example with a Rollover Plan: For 2023 with the $3,050 cap, you’d have to so wildly miscalculate your health care expenses that you left $1,525 of your $3,050 election unspent. ($3,050 x 30% = $915, but $610 is protected no matter what, so you have to add that amount to the $915 loss you will suffer if you don’t participate at all.)
If your calculations are off by that much, then yes – these plans are probably not for you! But if you’re willing to spend a few minutes adding up your estimated annual costs as nicely outlined by @LSLGuy, then at the current Health FSA maximum, you’re going to save at least $915 in taxes this year. Pay yourself or the IRS, the choice is that simple.
Hope this clarifies!
I’ll give you the same advice I give employees of my clients if they’re hesitant to participate in these plans: Save your health/dental/vision care receipts for a year and add them up. Remember that your Health FSA covers qualified medical expenses for every member of your family whom you are eligible to claim as a legal dependent on your tax return. You’ll soon see that what you spend on these costs usually exceeds what you thought they were. Then calculate the 30%-40% tax you’ve paid that you could have saved. Hmmmm.
In addition to the excellent informative posts above, some more regulations about HSA and FSA. This may be unique to my employer, but I don’t think it is.
The only way to qualify for an HSA is to have a high deductible health plan. So you can open an HSA, but then you can only withdraw as much as you’ve put into it. Those funds can be used for Medical, Rx, Dental, and Vision expenses. Anything left in the account at the end of the year, rolls over to the next year, and can even earn some interest.
Now, you can also open a Flex account (FSA), but if you also are using the HSA, then only Rx, Dental and Vision expenses are eligible. (not medical) So you really want to be careful with how much you put in the FSA. Anything not used by the end of the year is forfeited. You have until the end of next March to submit expenses, but they must have service dates in the previous year.
We’ve had threads and threads on how to max-perform the benefits of an HSA. Which are out of scope for this OP, but are readily searchable by anyone actually interested in how to play the HSA game for max advantage.
It’s a good thing you asked in this thread though. Because you don’t have an HSA, and all that prior discussion about HSA’s would have been inapplicable to you and led you to greater confusion.
Here are a few HSA threads for anyone that may be following along or find this thread later. In reverse chrono order = newest on top:
For your gum surgery - or any other eligible healthcare expenses you have throughout the year - you can withdraw funds from your HCFSA to reimburse yourself. In other words, pay for the surgery and withdraw the entire amount at the end of the year. Or, withdraw what you can when the bill is due, pay the balance, and then withdraw that same amount later, at the end of the year. Does that make sense?
Since I wrote the OP, I created an account with the site that operates the HCFSA and activated the credit/debit card that came with it. It appears that the entire $2,500 amount is available immediately so I’m going to try to use it to pay for the surgery on Thursday. (Gum surgery is apparently not covered by either medical or dental insurance.)
Excellent! That’s exactly how flex accounts are designed to work. Interestingly, even if you leave your employer mid-year, they don’t make you pay it back. At least not at my company.