The IRS makes a distinction between a health savings account (HSA) and a health flexible apending arrangement (FSA). Both plans allow you to make tax-free contributions to pay for qualifying medical expenses, which the IRS details in Publication 502 - Medical and Dental Expenses. Although their goals are similar, these two plans have some key differences. One notable difference is that you lose the money in your FSA if you quit your job, but you get to keep HSA funds, regardless of whether you quit your job or not.
In some cases, you may be able to have both an FSA and HSA account simultaneously, but you'll need to check with your employer to see if he offers an "HSA-compatible FSA."
You voluntarily contribute to an FSA plan by having your employer withhold deductions from your pay through what is often called a salary reduction agreement. Employers may also contribute to this plan, depending on plan type, but they are not required to contribute or even to offer FSAs to their employees. As of 2019, the IRS caps FSA contributions at $2,700 per year, which is a $50 increase over the maximum allowable 2017 contribution.
Even though you make contributions to an FSA periodically during the course of a year, you have access to the full yearly amount as soon as you enter into your company's plan agreement. For example, you may elect to contribute $1,000 over the course of a year to your FSA. Even before you receive a paycheck that reflects the first FSA deduction, you can use the entire $1,000. If you quit your job before you've even contributed $1,000 to your FSA, you're typically not required to reimburse the fund any amount that you've spent.
FSA Withdrawal Exceptions
Conversely, an FSA is a "use-it-or-lose-it" plan, which means that if you do not use your contributions by year-end, you can lose them. There are two exceptions to the use-it-or-lose-it scenario, depending on the specific terms of your FSA: 1) a grace period or 2) a carryover. A grace period gives you two and a half months after the end of the FSA plan year to spend the funds.
For example, in 2019, you have until March 15 to spend unused funds before you'd lose them. The carryover option allows you to transfer up to $500 in unspent funds to the following year. Employees can only offer one of these options (not both), but they are not required to offer either of them.
FSA Tax Implications
Your FSA contributions are not subject to federal income, Social Security or Medicare taxes. An exception is the contribution that your employer may make to provide you with long-term health care insurance – this must be considered as part of your taxable income
You must qualify for an HSA plan, as outlined in IRS Publication 969 - Health Savings Accounts and Other Tax-Favored Tax Plans. Generally speaking, to qualify you must have a high deductible health plan, have no other health coverage, not be enrolled in Medicare and not be claimed as a dependent on someone else's tax return during the previous year.
A trustee administers HSA plans. Trustees include your employer, an insurance company, a bank or any other IRS-approved trustee. You can make contributions through your employer or you can make them yourself, if you're self-employed. Family members or even unrelated people can also make contributions on your behalf. Similar to an FSA, you can have your contributions deducted directly from your paycheck.
Contributions to your HSA are not counted toward your gross income, and when you withdraw funds from your HSA to pay for eligible medical expenses, the money is not taxed. If you withdraw money from your HSA to pay for non-medical expenses, and you're younger than 65, it's not only taxed but is also assessed a 20 percent penalty. If you're 65 or older, it's taxed but you don't have to pay a penalty.
HSA Contribution Limits
Depending on the type of HSA you have (and other requirements, which are listed in IRS Publication 969), you can contribute up to $3,450 for yourself and up to $6,900 if you have a family. The IRS defines an HSA as "portable," which means that it remains with you if you change jobs or even if you leave the workforce entirely.
- IRS: Publication 969 - Health Savings Accounts and Other Tax-Favored Health Plans
- IRS: Publication 502 Medical and Dental Expenses
- IRS: Plan Now to Use Health Care Flexible Spending Arrangements in 2018
- Kiplinger: What Happens to Your Flexible Spending Account When You Quit
- HealthInsurance.org: What is the Difference Between a Medical FSA and an HSA?
- Society for Human Resource Management: 2018 Family HSA Contribution Limit Stays at $6,900 After All
- Kiplinger: Can I Contribute to Both an HSA and an FSA?
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.