Do I Need an FSA if I Have an HSA?

Managing healthcare costs is a priority for many. Understanding various savings vehicles is important for financial wellness. Knowing how different accounts are structured and their benefits helps in planning for healthcare expenditures. This approach allows individuals to optimize resources for health-related costs.

How Health Savings Accounts Work

A Health Savings Account (HSA) is a tax-advantaged savings option for individuals with a High-Deductible Health Plan (HDHP). To be eligible, one must be covered under an HDHP and generally not have other health coverage, be enrolled in Medicare, or claimed as a dependent. HDHPs have a higher annual deductible and a maximum limit on out-of-pocket medical expenses. The Internal Revenue Service (IRS) sets and adjusts these limits yearly.

HSAs offer a triple tax advantage: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. Payroll deductions are excluded from gross income, and direct contributions are deductible even without itemizing. Qualified medical expenses include costs for diagnosis, treatment, or prevention of disease. Examples are deductibles, co-pays, prescription medications, vision care, and dental services.

HSA funds are owned by the individual and are fully portable, remaining with the account holder even if they change employers or health plans. Funds roll over year to year, allowing for long-term accumulation and investment growth. HSAs can function as a retirement savings vehicle; funds are tax-free for qualified medical expenses at any age. After age 65, non-medical withdrawals are subject to income tax but not penalties. The IRS sets annual contribution limits, varying by coverage type, with a catch-up contribution for those 55 and over.

How Flexible Spending Accounts Work

A Flexible Spending Account (FSA) is an employer-sponsored benefit allowing employees to set aside pre-tax money for out-of-pocket healthcare costs. Contributions are deducted from paychecks before taxes, reducing taxable income. While Health Care FSAs are most common, covering medical, dental, and vision expenses, Dependent Care FSAs also exist for childcare or adult dependent care services.

A core characteristic of a Health Care FSA is the “use-it-or-lose-it” rule, meaning unused funds are typically forfeited at year-end. Employers can offer exceptions, such as a grace period extending the time to incur expenses by up to 2.5 months. Another option is a carryover, allowing a set amount of unused funds to roll into the next plan year. Employers can implement either a grace period or a carryover, but not both.

The full annual election amount for an FSA is typically available on the first day of the plan year, even if not fully contributed. Reimbursement for qualified expenses can be obtained by submitting claims or using a dedicated debit card. Unlike HSAs, FSAs are generally employer-owned, not portable, and remain with the employer if an individual leaves their job. The IRS sets annual contribution limits for FSAs, which employers may further restrict.

Combining an HSA with an FSA

Generally, an individual cannot simultaneously hold a full-purpose Health Care Flexible Spending Account (FSA) and contribute to an HSA. The IRS views a general-purpose Health Care FSA as “other health coverage” incompatible with HSA eligibility. This is because a standard FSA provides “first-dollar” medical coverage, covering expenses before an HDHP deductible is met, which conflicts with HSA requirements.

Despite this rule, specific FSA types are compatible with an HSA. One is the Limited Purpose Flexible Spending Account (LPFSA). An LPFSA restricts eligible expenses primarily to dental and vision care, such as eye exams, eyeglasses, and dental cleanings. By limiting covered expenses, an LPFSA allows pre-tax funds for these needs while maintaining HSA eligibility for broader medical expenses.

Another compatible option is the Post-Deductible FSA. This FSA initially covers only dental and vision expenses, like an LPFSA. Once the HDHP deductible is met, it expands to cover a wider range of qualified medical expenses. This structure ensures the FSA does not provide “first-dollar” coverage for general medical expenses, maintaining HSA eligibility. Both LPFSA and Post-Deductible FSA contributions are subject to the “use-it-or-lose-it” rule, though they may offer grace periods or carryover options.

Deciding on the Right Account Strategy

Choosing the right account strategy involves evaluating healthcare needs, financial circumstances, and long-term savings goals. For those with an HDHP, an HSA offers tax-free growth and portability, allowing funds to accumulate and serve as a retirement savings vehicle. Maximizing HSA contributions first is often a good strategy to leverage these long-term benefits.

However, if dental or vision expenses are substantial, or if preserving HSA funds for future medical needs or retirement is desired, an LPFSA can complement an HSA. An LPFSA allows pre-tax dollars for immediate dental and vision costs, freeing up HSA funds to grow. A Post-Deductible FSA can also be beneficial for those who expect to meet their HDHP deductible and wish to cover subsequent medical expenses with pre-tax funds.

The decision also depends on whether an employer offers compatible FSA options, as FSAs are employer-sponsored. Individuals should consider their typical annual out-of-pocket medical, dental, and vision expenses and comfort with the “use-it-or-lose-it” rule. Estimating expenses is important to avoid forfeiting unused funds. Reviewing available benefits and financial projections can guide individuals in selecting the best account strategy for their health and financial objectives.