How to Spend FSA or HSA Money—And What to Know Before 2023

Financial planning probably isn’t the most fun you’ll have over the holidays. But because some accounts and insurance plans expire at the end of the year, ‘tis the season to make sure you don’t leave any money on the table.

Two common sources of financial confusion are Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). These accounts can save you money on many health-related expenses incurred over the calendar year. However, to get the most out of these plans, it’s important to understand how they work—especially since many FSAs are about to expire.

Here’s what you need to know about FSAs and HSAs.

What is the difference between FSAs and HSAs?

FSAs and HSAs are savings accounts that let people set aside pre-tax funds for health-related expenses. To spend these accounts, you’ll typically receive a debit card to pay for expenses directly; otherwise, you must keep your receipts and submit them later for reimbursement. The IRS also requires that you keep records of what you buy, so hold onto your receipts.

However, there are several important distinctions between these two accounts.

For one, while an FSA is independent of your insurance plan, HSAs are only open to people with high-deductible health plans—which, in 2023, will mean a deductible of at least $1,500 for individual coverage and $3,000 for a family, says Susannah Snider, a certified financial planner and managing editor for financial education at SmartAsset, a company that provides personal finance tools.

Another big difference is that FSAs have deadlines, by which point people need to spend all the money in the account. HSAs, meanwhile, accrue over time, don’t expire, and you can opt to invest them. If you change jobs, you can take these funds with you (although you can’t continue to make contributions in the same account).

“You can continue to grow those HSAs for years, so long as you don’t need the funds,” says Silvia Tergas, a financial planner at Prudential’s Mid-Atlantic Financial Group. “Think about having that be the pool of funds where you draw from in retirement for medical expenses, for example.”

When does FSA money expire?

FSA deadlines are at the end of the calendar year, or another predetermined benefit period. Check with your employer to find out your account’s terms.

What is the “use it or lose it” rule?

All of the money in FSAs must be used before the end of the year. However, some employers offer “grace periods,” or extensions during which employees can spend the rest of the funds. These grace periods typically last 2.5 months. Some employers permit a small portion of the funds to roll over, says Tergas.

Tergas recommends staying on top of your balance throughout the year. “I see people leaving money on the table, and maybe not even utilizing those dollars and not really realizing that they’re just going away.”

Meanwhile, this rule doesn’t apply to HSAs. “HSAs are not ‘use it or lose it’ accounts like Flexible Spending Accounts. If you do not spend all the money you’ve contributed into a HSA, it will ‘roll over’ or stay in the account from year to year,” says Sofia Figueroa, certified financial planner at Ellevest, an investing platform which specializes in working with women.

What purchases can you make with FSAs and HSAs?

Lots of products are eligible for purchase under FSAs and HSAs, including some that may surprise you. Sunscreen, tampons, baby bottles, contact solution, hearing aids (including newly available over-the-counter devices), and glasses all qualify. Some websites have created pages for FSA and HSA-eligible products, including Amazon and Walmart; there’s even an outlet that specializes in these accounts, known as the HSA Store.

The accounts can also cover health care bills, including from doctor’s offices and hospitals. However, some health care expenses don’t apply, such as certain cosmetic procedures, and the accounts can’t cover bills from before the account was established, says Snider.

What should you do if you forgot to spend down your FSA over the year?

There’s still time to review your medical bills and submit them for reimbursement, or to schedule a doctor’s appointment for December that you may have been putting off, says Snider. As long as these expenses were incurred in 2022 and qualify, your FSA should cover them.

Many products you probably use all the time are also available through FSA. However, be careful not to buy too many of the same products, as the IRS doesn’t allow FSAs to be used for stockpiling. (The IRS doesn’t define how many products would qualify as stockpiling, although it does say that the accounts are meant for medical care used in the current year—not a future year.) So “stocking four years’ worth of Tylenol might get your claim denied,” Snider says.

What’s the smartest way to spend HSA accounts?

One option is to hold onto the funds in your HSA and invest some portion. Since HSAs can continue growing, can be invested, and don’t expire, they can become a valuable asset, says Tergas. These funds have a “triple tax advantage,” she says: “pre-tax contributions, tax-free growth, and tax-free withdrawals, so long as those withdrawals go towards paying for health care expenses.”

However, Figueroa emphasizes that HSAs may not be the best options for some individuals, especially because they accompany high-deductible health plans, which can lead to costly deductibles. “If you or your family generally incur substantial medical costs annually, you may be better off choosing a different health plan and maximizing your savings through other vehicles like 401(k)s, IRAs, and brokerage accounts,” she says.

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