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  1. What is an HSA?
  2. How to Qualify to Contribute to an HSA
  3. How Much Should You Contribute to an HSA?
  4. How and When to Use Your HSA Funds
  5. HSAs, FSAs and Limited-Purpose FSAs
  6. HSA Strategies for Different Life Stages
  7. Using Your HSA as a Retirement Savings Tool
  8. The Bottom Line

HSA stands for health savings account. FSA stands for flexible spending account (or “arrangement,” per the IRS). Both of these names make perfect sense, but it’s unfortunate that their abbreviations are so similar because that confuses a lot of people. What’s similar about HSAs and FSAs is that both are funded with pre-tax dollars and both let you take withdrawals tax free to pay for qualified medical expenses. Beyond that, there are many differences.

What’s an FSA?

An FSA does not require that you have a high-deductible health plan. It has a lower annual contribution limit – $2,650 for 2018 – and the limit is the same whether you’re single, married or married with kids. That’s because it is a per-employee limit, not a per-household limit. If you have an FSA at work and your spouse does, too, you can each contribute $2,650. But if only you have an FSA, only you can contribute.

You can’t take your FSA account with you if you change jobs, and you can’t earn interest on the money or invest it. If you don’t spend the full balance within the plan year, you’ll either lose it, be able to carry over a small amount (such as $500) or have a bit of extra time (say, 90 days) the following year to spend it down, depending on your employer’s rules for FSAs. You can’t contribute to an FSA if you’re self-employed or unemployed, and the only party that can contribute to your account on your behalf is your employer.

How an HSA Is Different

An HSA has a higher annual contribution limit, as we discussed in section 3, and the limit is higher if you’re married than if you’re single. If you and your spouse each have access to an HSA through different employers, you can’t contribute the family maximum to each; you can only contribute the family maximum between the two of you. You can put the maximum in either spouse’s account or divide it any way you want.

You can take your HSA with you if you change jobs, and you can earn interest on the balance or invest it. The balance carries over from year to year, and you can have an HSA if you’re self-employed or unemployed, as long as you have a high deductible health plan. Anyone can contribute to an HSA on your behalf, although only you and your employer can get a tax break on those contributions.

An Alternative: The LPFSA

Since HSAs and FSAs both have low contribution limits relative to what you might end up spending on medical bills in a bad year, it might seem like you should open both. Unfortunately, you generally can only have one or the other. Don’t expect Uncle Sam to get too generous with the tax savings.

There’s an exception, though, called a limited purpose FSA (LPFSA). If your employer offers it, you may be able to use an LPFSA to pay for dental and vision expenses such as cleanings, fillings, eye exams and contact lenses before you meet your health insurance deductible. Alternatively, you might be able to use it to pay for qualified medical expenses after you meet your deductible.  Some employers let you use an LPFSA for both.

Check your employer’s summary plan description for full details about how you can use your LPFSA. For example, you might be allowed to open a limited purpose FSA whose balance can initially only be used for qualified vision and dental expenses. If you meet your health insurance deductible, however, you might then be able to use your LPFSA for any qualified medical expense.

The limited nature of the LPFSA makes contributing to it a bit more of a gamble unless you have a clear picture during open enrollment of what your dental, vision and medical expenses will be for the following year. LPFSAs have all the portability and use-it-or-lose-it restrictions of regular FSAs.

Here’s the worst-case scenario: You contribute $2,650 to your LPFSA, then end up having only $500 in medical expenses for the whole year. You don’t meet your health insurance deductible, and you don’t have any dental or vision expenses. You have no LPFSA-eligible expenses for the year. Your employer might let you roll over $500 to the following year or give you a 90-day grace period to use your LPFSA balance the following year, but you’d likely be out a lot of money. It would be a loss of pre-tax dollars, but it would still be a significant loss.

If an LPFSA is available to you, carefully calculate the amount you can almost guarantee you will spend, then add a cushion of perhaps $500 if your employer offers a grace period or rollover to use excess contributions in the following year. (For more on this topic, read Comparing Health Savings and Flexible Spending Accounts.)


HSA Strategies for Different Life Stages
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