Many employers offer health insurance plans to their employees that include flexible health spending accounts as part of the benefit. A flexible health spending account (sometimes called an HSA or FSA) is a special account that the employee puts money into for the specific purpose of paying for certain out-of-pocket healthcare costs.
These accounts allow for either the employer or the employee to put aside part of the employee’s paycheck into the account before the income is taxed. Since the money is put aside before the income is taxed, employees may also receive a tax benefit by participating in the plan.
There are specific rules for how the money in the flexible health spending account can be used. The money in the account must be used for healthcare related expenses. However, not every health care related expense qualifies under the rules for the account. For example, often the money in the account can be used to pay for prescription medications, but not nonprescription over-the-counter medications.
There are also different types of flexible health spending accounts. Some can be designed specifically for the benefit of children, other dependents, or even for specific health conditions. Each of these types of account has its own rules about how the money in the account can be spent, and what expenses qualify for coverage under the health spending account.
A flexible health savings account may be referred to as a savings account, but it actually operates more like a checking account. When you open an HSA, you are issued checks to draw on that specific account as well as a debit card to use for your health related expenses.
In order to get a flexible health spending account, your employer must offer it as part of an overall health insurance benefits package. You cannot get an HSA on your own, as it must be part of the existing health insurance plan. Many employers will match or exceed the employee’s contribution to the account (in some ways, this contribution system can be compared to a 401K plan).
For instance, if an employee contributes $5 directly from their paycheck, their employer may deposit at least $5 to match the employee’s contribution. However, since employer matching is not a requirement for HSAs, you will want to confirm with your employer or your plan administrator whether the employer has elected to match the employee contributions.
Yes, there are rules that specifically dictate how you can use your flexible health spending account. There are also rules regarding the specific amounts. If you have a flexible health spending account as part of your health insurance benefits, your employer should provide information on the rules for you.
For example, HSAs are limited in terms of the amount of money in the account, with a maximum of approximately $2600-$2700 per year per employer. Other common rules regarding HSAs include:
- HSA accounts must be renewed annually or changed if the employer’s health insurance plan changes;
- You can spend HSA funds to pay deductibles and copayments, but not for insurance premiums;
- FSA funds are okay to spend on prescription medications as well as to help cover the costs of medical equipment like crutches, supplies like bandages, and diagnostic devices such as blood sugar test kits; and
- Ineligible expenses include orthodontia, cosmetic surgery, vitamins, herbal supplements, prescription drugs from foreign countries, and counseling sessions.
Generally, you must use the money in your flexible health spending account within the plan year. However, your employer may offer one of two options to help ease the stress of “use it or lose it.” These options are:
- Grace Period: Your employer can offer a grace period of up to two and a half months for you to use the remaining or left over money in your flexible health spending account; and
- Carry Over: Your employer may alternatively allow you to carry over up to $500 per year into the following year.
At the end of the year or grace period, any money left over in the HSA is lost, and the employee starts over again with building up contributions. For this reason, it’s important to plan carefully and not put aside more money than is really necessary into the HSA. It may be tricky to estimate yearly costs. However, to successfully use your HSA without losing too much money at the end of the year, you’ll want to estimate as closely as possible your yearly expenses on things like copayments, coinsurance, drugs, and other healthcare costs.
It is always a good idea to consult a lawyer if you have questions. Since HSAs have specific tax implications for the employee, it is important to understand exactly what the implications are and how you need to address them.
A qualified employment lawyer can explain your plan to you so that you can make the most of it, and also help you figure out how the HSA may affect your taxes.