FSA? HSA? WTF?
It’s time to think over your health insurance game plan for 2022 (ah, the joys of adulting!). When it comes to health insurance plans and benefits, there is a ton of jargon and acronyms. Two you probably have already come across are FSAs and HSAs.
FSA stands for flexible spending account while HSA stands for health savings account. Both FSAs and HSAs are accounts that you fund with a portion of your pre-taxed income. You can use these funds on medical expenses— and because you’re using pre-tax money, you can essentially think of these purchases as discounted. It’s estimated that you can save around 30% on medical purchases through FSAs or HSAs. There’s a certain limit to how much money you can contribute, of course, but that money is yours to use for the year on eligible medical purchases. Most costs you incur at a hospital are eligible, of course, but a good amount of the things you might already have in your bathroom are eligible; things like first aid kits, sunscreen, allergy meds, chapstick, and so on.
What’s the upside?
The benefit of using FSAs and HSAs is the principle of pre-taxed contributions. Let’s say your annual pay is $50,000. If you decide to forgo the FSA or HSA option, then, come tax season, Uncle Sam is presented with all $50,000 of your monies. That means that after taxes, you’re probably taking home about $35,000. Oof.
Now, come the medical expenses. After covid tests, hospital check-ups and trips to the pharmacy, let’s say that you spent around $2,000 on medical care. So when all is said and done, you have $33,000 left in your pocket.
Now let’s look at the same example, but you have a FSA or HSA. Let’s rewind to when we were looking at your gross annual pay, $50,000. Because you have a FSA, you get to contribute the $2,000 that you expect to spend on medical expenses before Uncle Sam has a chance to tax you.
So, once you scoot that $2,000 over to your FSA account, the IRS then taxes your adjusted pay: $50,000 minus your FSA contribution, leaving them with $48,000 to work with. Assuming that same tax rate, after taxes, you’ll be left with $33,600 in your pocket.
In the non-FSA example, you only had $33,000 in your pocket after taxes. So, you just saved $600! Sweet!
How are FSAs and HSAs different?
There are some key differences between FSAs and HSAs. In general, HSAs can be a bit of a more exclusive club. That is, in large part, because there are more eligibility requirements for HSAs than FSAs. To be admitted into the HSA clique, you need to be enrolled in a high-deductible health insurance plan. And, if you’re eligible for Medicare and/or you can’t be claimed as a dependent on someone else’s task return— well then, according to the HSAs, you can’t sit with us.
For a FSA, the only barrier to entry is that FSAs need to be set up by an employer. And for all of us self-employed folks, business owners can only contribute to an FSA if they own less than 2% of the company.
But, while HSAs have more hoops to jump through for enrollment, the payoff can be better than with FSAs. Because with HSAs, any unused funds in your account at the end of the year, rolls over to the next year.
With FSAs, for the most part, unused money does not roll over. Although, some health plans allow a little bit of carry-over. In 2020, the maximum you could carry over in the New Year was $50. But in 2021, that carry-over maximum was bumped up to $550 because, you know, it was a pandemic. But still! If you contributed $2,000 and touched none of it— even with the $550 carried over— you still lost $1450! So in some ways, the HSAs are actually more flexible than the so-called “flexible savings accounts.” You gotta love finance jargon.
Also, you can contribute more to your HSA than your FSA. In 2021, the amount you can contribute to your HSA as a single, unmarried person is $3,600, while with a FSA, the contribution limit is $2,750.
I’m sold on the -SAs. How much should I contribute?
It’s a bit of a dance here. The more you contribute, the less adjusted income Uncle Sam can tax, and we like that. But on the other hand, if you’re maxing out your FSA at $2,750, but you only spend $1,000 a year on qualified expenses, you’ll have $1,750 of unused funds. And remember— most of it doesn’t roll over, so you’ll be panic-ordering hundreds of bandaids on the reimbursement deadline.
Use the FSAFeds Calculator to help you figure out how much to contribute to your account. And if it’s a FSA, just make sure to use your funds before it’s too late!