How to Spend FSA or HSA Money—And What to Know Before 2023

Financial planning is probably not the most fun you’ll have during the holidays. But since some accounts and insurance plans expire at the end of the year, now is the time to make sure you’re not leaving any money on the table.

Two common sources of financial confusion are Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). These accounts can save you money on many health-related expenses incurred during the calendar year. However, to get the most out of these plans, it’s important to understand how they work—especially since many FSAs are about to expire.

Here’s what you need to know about FSAs and HSAs.

What is the difference between FSAs and HSAs?

FSAs and HSAs are savings accounts that allow people to set aside pre-tax funds for health-related expenses. To spend on these accounts, you usually receive a debit card to pay the expenses directly; otherwise, you should keep your receipts and submit them later for payment. The IRS also requires that you keep records of your purchases, so keep your receipts.

However, there are several important differences between these two accounts.

For one, while an FSA is independent of your insurance plan, HSAs are only open to people with a high-deductible health plan—which, by 2023, means a deductible of at least $1,500 for individual coverage and $3,000 for a family, says Susannah Snider, a certified financial planner and managing editor for financial education at SmartAsset, a company that provides personal finance tools.

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Another big difference is that FSAs have deadlines, by which people must spend all the money in the account. HSAs, on the other hand, accumulate over time, don’t expire, and you can choose to invest them. If you change jobs, you can take these funds with you (although you can’t continue to make contributions to the same account).

“You can keep growing HSAs for years, as long as you don’t need the funds,” says Silvia Tergas, a financial planner with Prudential’s Mid-Atlantic Financial Group. “Imagine having that one pool of funds that you draw from in retirement for medical expenses, for example.”

When does FSA money expire?

FSA deadlines are at the end of the calendar year, or another predetermined benefit period. Talk to your employer to find out the terms of your account.

What is the “use it or lose it” rule?

All money in FSAs must be used before the end of the year. However, some employers offer “grace periods,” or extensions where employees can spend remaining funds. These grace periods usually last 2.5 months. Some employers allow a small portion of the funds to be transferred, Tergas said.

Tergas recommends staying on top of your balance throughout the year. “I’ve seen people leave money on the table, and maybe not even use the dollars and never know they’re going to disappear.”

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However, this rule does not apply to HSAs. “HSAs are not ‘use it or lose it’ accounts like Flexible Spending Accounts. If you don’t spend all the money you contribute to an HSA, it will ‘roll over’ or stay in the account each year, ”said Sofia Figueroa, certified financial planner at Ellevest.

What purchases can you make with FSAs and HSAs?

Many products are eligible for purchase under FSAs and HSAs, including some that may surprise you. Sunscreen, tampons, baby bottles, contact solution, hearing aids (including newly available over-the-counter devices), and glasses are all eligible. Some websites have created pages for FSA and HSA products, including Amazon and Walmart; There is even an outlet that specializes in these accounts, known as the HSA Store.

Accounts can also include health care bills, including those from doctor’s offices and hospitals. However, some health care expenses are not available, such as certain cosmetic procedures, and the accounts cannot cover bills from before the account was established, Snider said.

What do you do if you forget to spend on your FSA for the year?

There’s still time to review your medical bills and submit them for reimbursement, or schedule a doctor’s appointment for December that you may have put off, Snider said. As long as these expenses are in 2022 and are eligible, your FSA should cover them.

Many products that you probably use all the time are also available through FSA. However, be careful not to buy too many of the same products, as the IRS does not allow FSAs to be used for stockpiling. (The IRS does not define how many products qualify as stockpiling, although it does say that the accounts are intended for medical care used in the current year—not in the coming year.) So ” stocking four years’ worth of Tylenol can be obtained. your claim is denied,” Snider said.

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What’s the smartest way to spend in HSA accounts?

One option is to keep the funds in your HSA and invest in some shares. Because HSAs can continue to grow, can be invested, and don’t expire, they can be a valuable asset, Tergas said. These funds have a “triple tax advantage,” he said: “pre-tax contributions, tax-free growth, and tax-free withdrawals, as long as those withdrawals go toward paying health care costs.”

However, Figueroa emphasized that HSAs may not be the best option for some individuals, particularly because they come with high-deductible health plans, which can lead to expensive deductible. “If you or your family typically have large medical expenses each year, you may be better off choosing a different health plan and increasing your savings through other vehicles such as 401(k)s, IRAs, and broker accounts,” he said.

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