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Many companies offer their employees a Flexible Spending Account (FSA) and/or Health Savings Account (HSA) to assist with medical/dental co-payments. Let us know if you have one of these accounts so we can help you maximize your health benefits.

Flexible Spending Account (FSA)

A flexible spending account (FSA), also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States. An FSA allows an employee to set aside a portion of earnings to pay for qualified expenses as established in the cafeteria plan.  It is most commonly for medical expenses but often for dependent care or other expenses such as dental. Money deducted from an employee’s pay into an FSA is not subject to payroll taxes, resulting in substantial payroll tax savings. One significant disadvantage to using an FSA is that funds not used by the end of the plan year are lost to the employee.

The most common type of flexible spending account, the medical expense FSA (also medical FSA or health FSA), is similar to a health savings account (HSA) or a health reimbursement account (HRA). In addition, funds in a health savings account are not lost when the plan year is over, unlike funds in an FSA. Paper forms or an FSA debit card, also known as a Flexcard, may be used to access the account funds.

Most cafeteria plans offer two different flexible spending accounts; one is for qualified medical expenses and the other is for dependent care expenses. A few cafeteria plans offer other types of FSAs, especially if the employer also offers an HSA. Participation in one type of FSA does not affect participation in another type of FSA, but funds cannot be transferred from one FSA to another.

Health Savings Account (HSA)

A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), funds roll over and accumulate year to year if not spent.

HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either HDHPs or standard health plans. HSA funds may currently be used to pay for qualified medical and dental expenses at any time without federal tax liability or penalty. However, beginning in early 2011 OTC (over-the-counter) medications cannot be paid with HSA dollars without a doctor’s prescription.

Withdrawals for non-medical expenses are treated very similarly to those in an Individual Retirement Account (IRA) in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier.