FSAs and HSAs: Understanding Which Account (or Both) You Should Contribute To

Part of choosing the right health insurance plan for you is knowing how to optimize the associated FSA or HSA account that you can contribute to as part of your health plan. Let’s walk through what the two types of accounts are, how they work, and when you should consider contributing to each one.

A Flexible Spending Account (FSA) and a Health Savings Account (HSA) are both types of accounts that allow you to set aside money for healthcare expenses on a pre-tax basis.

First of all, a Flexible Spending Account (FSA) and a Health Savings Account (HSA) are both types of accounts that allow you to set aside money for healthcare expenses on a pre-tax basis. They are each a separate account that you choose to have part of your paycheck put into by your employer. You can use the money in these accounts to pay for eligible healthcare expenses throughout the year, including co-pays, prescriptions, and deductibles. Great. This is so far a fun “icing on the personal finance cake” benefit: using pre-tax money to pay for actual expenses. 

Here’s an example: Monae makes a $100,000 salary working for Tech Company A in Washington and she contributed $500 to her FSA in 2023. She used that money to pay for contacts at her eye doctor in October using her FSA debit card. If she files taxes single for that year, she has saved 24% by using the money in the pre-tax account instead of her regular paycheck/credit card (and that doesn’t even include state taxes because WA has no income tax!). Put another way, she was able to have an “extra” $120 available to pay for the contacts because she did not pay that $120 to federal taxes via her regular paycheck; so the $500 worth of contacts only “felt” like it cost her $380. (Her marginal federal tax rate is 24%; ignoring FICA here.) That’s fun!

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Now though, there are some differences between an FSA and HSA. To help you remember which is which, I like to think that the “S” for “Spending” in FSA implies that you need to spend the money, while the “S” in HSA for “Saving” implies that it’s more about saving it and you get to keep that money.

The money you contribute to your FSA account each year is typically “use it or lose it”, which means that you typically only want to contribute as much as you think you will actually spend that coming year. The contribution limit set by the government is $3,200 for 2024 - that’s the maximum you could elect to put in over the course of the year. Now while your employer may choose to offer an amount that rolls over to the following year if not spent (e.g. $500) or extra time to spend the money (typically through March of the following year), they don’t have to. It’s important to know your employer’s benefit options here, and to think ahead with your expected healthcare expenses for the year here.

HSAs, on the other hand, are yours forever. They do not have any kind of use-it-or-lose-it rule. You can contribute up to $4,150 (or $8,300 for families) to your account in 2024, and this amount is yours to spend on healthcare or invest for the future. This money has also gone into the account on a pre-tax basis, and it actually can come out on a tax-free basis as well (what?!) as long as it’s used for health expenses later in retirement. You typically have the option to invest any amount over a minimum threshold on a tax-deferred basis while the money is in the HSA account, which makes this account a “triple tax benefit” in the world of financial planning. (And this is part of the whole point of the HSA. No other retirement account is like this - the tax benefits are typically either up front or on the back end.)

To be eligible to contribute to an HSA, you have to be enrolled in a High-Deductible Health Plan (HDHP).

The important caveat here though, is that to be eligible to contribute to an HSA, you have to be enrolled in a High-Deductible Health Plan (HDHP). While you can contribute to an FSA with any other health plan, the HSA can only “come with” a HDHP. This means that it’s only worth doing if you expect to 1) not have many health expenses for the coming year or will have so many health expenses that you’ll be way over the out of pocket limit, and 2) can pay for any health expenses you’re responsible for out of pocket.

Now! Contributing to an FSA and HSA account are typically mutually exclusive because of the types of health plans they are associated with. But just to make things a bit more confusing, if your employer offers what’s called a “limited FSA”, that’s awesome. That means if you decide to sign up for a HDHP and contribute to an HSA, you can still optionally sign up for the limited FSA as well. The limited FSA works just like a regular FSA, except you can only use the expenses for dental and vision. If you’re like me, and spend lots of money on contacts every year, then this can be a great option to “do both”!

The limited FSA works just like a regular FSA, except you can only use the expenses for dental and vision.

Important Note: All of your FSA account money is available to you on January 1 of the calendar year, even though you haven’t actually contributed that much yet. A nice perk for any larger health expenses in the beginning of the year! (And it’s not paid back if you were to leave before contributing how much you’ve actually spent.) HSAs, on the other hand, do not work that way - the money becomes available to you as you contribute to it.

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P.S. You can spend the money in an HSA for health expenses at any time with no penalty, regardless of the health plan you’re currently enrolled in. The HDHP requirement only applies to contributing to the HSA.

So, yes! In short, you should strongly consider contributing to one (or both) of these accounts this year. It’s fun to take advantage of that icing on your personal finance cake.

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