Q: Can I have an FSA and an HSA at the same time?

Health savings accounts (HSAs) and health flexible spending accounts  (health FSAs) are employee benefits that allow eligible individuals to put aside pre-tax dollars—which aren’t subject to income or payroll taxes—for eligible medical expenses. Employees generally can’t have both at the same time, but there are some ways to enjoy the benefits of a health FSA and still contribute to an HSA.

How does an HSA work?

An HSA is a type of savings account that lets you put away money on a pre-tax basis to pay for eligible medical expenses. Eligible medical expenses generally are those that would qualify for the medical and dental expense deduction on your federal income tax return. They include healthcare insurance policy deductibles, copayments, and coinsurance (but not premiums).

Unspent HSA funds roll over to the next year. In addition,HSAs are portable—if employees leave their job, their HSA belongs to them and can go with them (unlike FSAs). 

Many HSAs have the option to invest the funds in markets or just interest-bearing accounts, too. The gains generally are tax-free. (Note: Some states do tax dividends and interest earnings on HSAs.)

When employees reach age 65, they can spend their HSA funds on both eligible medical expenses and non-health related expenses. That means an HSA is another avenue for building retirement savings. They  must, however, pay income tax on withdrawals not applied to eligible medical expenses.

HSAs come with numerous requirements and limits. For example:

  • High deductible health plan (HDHP): The employee must have an HSA-eligible HDHP, which usually covers only preventive care services until the deductible is met. While the high deductible must be satisfied before broader insurance coverage kicks in, these pre-tax dollars can be used to help cover eligible expenses. 
  • Contribution limits: Employees can contribute no more than the annual limit set by the IRS. For 2021, the annual limit on tax-deductible contributions is $3,600 for individuals and $7,200 for family coverage. Employer contributions do not count toward the limit or as gross income for tax purposes. (Note: Some states tax HSAs. Review your state law, as certain amounts may be taxable.)

    As a result of this tax treatment, employees can generally reduce their taxable income and save on eligible medical expenses—notably, taxes they otherwise would have paid their earnings.
  • Funds availability HSA funds are available only after they’re contributed, also known as being post-funded. Employees can submit for reimbursement of previously incurred eligible expenses when the funds become available, as long as they were participating in the HSA when those expenses were incurred.

How does a health FSA work?

Health FSAs let employees contribute a portion of their paychecks to use for eligible medical expenses. The IRS sets the maximum annual contribution for each year—for 2021, the max is $2,750.

Like HSA contributions, paycheck deductions for health FSAs are pre-tax. If the employer also makes contributions, those amounts aren’t included in the employee’s gross income. Unlike HSAs, employees can use an FSA to pay eligible medical expenses before the contributions hit the account, up to the amount the employee has elected to contribute that year (also known as pre-funded).

Another contrast between the two arrangements is that health FSA contributions generally must be spent within the plan year—unspent funds may be forfeited. An employer might, however, allow its employees to roll over up to $550 in unused health FSA funds to the next plan year. An employer  could also offer employees a grace period of up to 2.5 months after the plan year to spend the funds for claims incurred during the grace period. Note: using the funds could impact HSA eligibility

One more distinction—employers “own” the health FSAs. When employment terminates, the funds are forfeited to  the employer. One exception is if the employee stays on the employer’s health care plan under federal COBRA. Most state continuation laws do not allow employees to keep their health FSA.

How can I have both a health FSA and an HSA?

The rules generally prohibit employees from having both arrangements because employees cannot have an HSA if they are covered by a non-HDHP health care plan (including Medicare). However, the IRS has specifically stated that an HSA is compatible with two kinds of health FSAs:

  • Limited-purpose FSAs, which typically cover eligible dental and vision expenses
  • Post-deductible FSAs, which cover all eligible medical expenses incurred after the minimum allowable HDHP deductible is met. (For 2021, the minimum deductible is $1,400 for individual coverage and $2,800 for family coverage.)

Employers also can offer a combination of limited-purpose and post-deductible FSA. Before the minimum HDHP deductible is satisfied, an employee can use the funds only for qualifying dental and vision expenses. After meeting the deductible, the funds can be used for all eligible medical expenses. These hybrid accounts are HSA-compatible, as well.

When possible, does it make sense to pair an HSA with an FSA?

At first glance, it might seem difficult or redundant to offer both. After all, an HSA can be used for the same expenses as a limited-purpose or post-deductible FSA, rolls over, is portable, and permits investing. Pairing the two provides some real advantages, though.

First of all, employees could save more pre-tax dollars by contributing to both an HSA and a health FSA than they could with only an HSA. If health FSA money is used to cover as many eligible expenses as possible while letting your HSA funds accumulate year after year—and possibly earn investment returns—employees may have more money available in later years.

Remember: HSA money can be spent on anything once the employee reaches age 65. (They must pay income taxes on withdrawals not applied to eligible medical expenses, though.)

Pairing the two arrangements also provides greater flexibility. The pre-funded nature of FSA funds allows employees to pay for eligible expenses immediately instead of waiting for deposits into the HSA. 

When pairing them isn’t possible, should I opt for an HSA or a health FSA?

The differences outlined above are just some of the important differences between HSAs and health FSAs. For employers, the choice between which to offer is relatively straightforward.

When employees can choose and select a health FSA, usually it’s because they’re not eligible for an HSA. They also might choose an FSA over an HSA because they expect a lot of healthcare expenses in the plan year that they don’t want to pay out-of-pocket. That is, they’d rather have immediate access to the funds than have to cover the expenses upfront and have to seek reimbursement later when funds become available in an HSA.

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