Flexible Spending Account (FSA)
With an FSA, money (in the amount you choose) is taken out of your paycheck before taxes and put into an account. The money in this account can be used to pay for medical expenses throughout the year and can be used in conjunction with any health insurance plan.
The most important aspect of FSAs is that they have a “use it or lose it” provision. You must use the funds in the account in the year in which those funds were saved or you will lose them at the end of the year when they are returned to your employer.
You will also want to check with your particular plan to find out which expenses are “covered,” meaning approved by the IRS as a qualified medical expense. Common FSA healthcare expenses include copayments, deductibles, glasses, contacts, dental/orthodontia, and over the counter medicines.
Health Savings Account (HSA)
With an HSA, money can be taken from you paycheck before taxes or you can open up an individual HSA account and contribute money on your own. Employers and family members may also contribute to your HSA. But remember, the money in the account is yours no matter who contributed to the fund. That means you can take your account with you if you change jobs and even us it in retirement. Money put into the HSA account is tax deductible form federal income tax and many state income taxes and can earn interest tax free from year to year. To qualify for an HSA, you must be enrolled in a “high-deductible health plan.” This means your health insurance plan, likely a PPO, requires you to pay a certain amount of money before your plan benefits begin.
The advantage of an HSA account is that you can use the funds to pay for your deductible. Another advantage of an HSA account is that there is no use it or lose it provision like FSAs. With an HSA, funds can be saved for future use and won’t be lost at the beginning of the year. Finally, although HSAs are meant for medical expenses, you are allowed to withdraw cash from your account, but expect to be taxed and have to pay an additional fee.