Year End Planning for FSAs and HSAs
Should you react to FSA-Day or HSA-Day notifications?
If you have a medical savings account (either a Medical Flexible Savings Account or a Health Savings Account) you may have received an “FSA Day” or “HSA Day” themed email from the financial institution that administers your account.
How you react to these reminders, if you need to react at all, depends on the type of account you have and your specific situation.
But first let’s make sure you understand how each of these accounts works. I have found people understand the differences if you think of it like a credit card versus a debit card.
An FSA is like a credit card (or line of credit).During Annual Enrollment you elect a “credit limit” amount. You can use your FSA “credit card” immediately and can spend up to the limit you elected. You will pay back the elected amount (whether you used it all or not) in equal payments deducted from your paycheck during the year.
An HSA is like a debit card (or checking account). During Annual Enrollment you elect how much you want to deposit in your account over the year. Those contributions are made in equal amounts each pay period. There are no funds available for you to spend until you have deposited that amount. At the end of the year unspent balance stays in your account for later use.
Flexible Savings Accounts (FSA)
If you signed up for a FSA you should understand that it is a “use it or lose it” account. The dollars you elected during enrollment need to be spent in the same year. There are some exceptions for runout (expenses in the current year that don’t get billed and paid until the next year) and carryovers (unused dollars you may be able to carry over for use in the next year), but those features are not required so check on what is allowed in your specific FSA plan. In addition to a Medical FSA account used to pay for you and your dependents’ eligible medical, dental and vision expenses, you may also have a Dependent Care FSA which can be used to pay for eligible dependent (child or elder) “daycare” expenses. This article addresses the Medical FSA.
The “FSA-Day” alert is a reminder that you may have unspent dollars remaining in your account.
Here is what you should think about:
1) Do you have any upcoming Medical related visits or procedures? If so, be sure to use your Medical FSA “credit card” to pay for those.
2) Did you have any medical related expenses earlier in the year that you didn’t use your Medical FSA debit card to pay for? You can reimburse yourself for those expenses before the end of the year.
3) If your Medical FSA plan lets you use current-year contributions next year, make sure you know how much you can use and any deadlines for using them. Similarly, if your plan permits a carry-over, make sure you know how much you are allowed to carry over.
4) If you still have an excess balance, you can review a list of FSA eligible items (it may have been included in the reminder communication) and stock up on eligible medical/dental/vision care items you are likely to use. Many first aid items and over-the-countermedications are eligible. It is better to spend your remaining balance on those items than lose any unspent balance.
5) If you don’t quite spend all the amount you elected, don’t sweat it. Your contributions were made with pre-tax dollars. For most people that means if you spent around 80% of the amount elected you probably at least broke even. If you spent more than that you come out ahead (from a tax standpoint). But if the thought of forfeiting any amount bothers you, review steps 1-4 again.
Health Savings Accounts (HSA)
If you enrolled in an HSA you are probably aware that those contributions do not have a “use it or lose it” requirement. All HSA balances roll over for your use in future years. That is part of the triple-tax advantage of an HSA. If your yearly contributions have exceeded your yearly expenses, that means you won! Meaning you saved money by having a lower premium contribution (for the required HDHP option) and your pre-tax deducted HSA savings were sufficient to cover your out-of-pocket expenses. If this was your first year participating in a High Deductible Health Plan with an HSA option, congratulations, the challenge of HDHP participation is being able to contribute enough money into your HSA to cover your pre-deductible expenses. Any unspent contributions are put you ahead for the second year.
Reminders about your HSA could be similar to a couple of the points in the FSA list above. Specifically, you should consider:
1) Whether you have any known upcoming Medical related visits or procedures you can pay for using your HSA? If so, just make sure your HSA balance is sufficient to cover those expenses.
2) Did you have any medical related expenses earlier in the year before you had much of a balance in your HAS? If so, you probably had to pay those out-of-pocket. But now that you have a more significant balance you have the option to reimburse yourself for those earlier expenses. However, if you managed to pay those without significant impact to your household budget, you may want to keep those funds in the HSA for future use when the budget impact may be more significant. However, if you need to reimburse yourself for those expenses you should feel free to do so.
3) If you are contributing to the HAS, but didn’t maximize the contribution allowed by the IRS, now is the time to think about whether you would like to lower your taxable income by making additional contributions. If you’re making your contributions through payroll deduction you may not be able to increase the amount contributed each pay period due to Payroll system limitations. But you should be able to make a contribution directly to your account using post-tax dollars. The HSA “bank” will provide you with documentation of your contribution so it can be factored into your tax return.
Other HSA Considerations
Your Health Savings Account consists of two portions. One part is the basic account that is available for paying eligible expenses. You probably earn some nominal interest on the balance in this part of the account. The other part of the account is an investment portion. Similar to a retirement plan, you have the option to invest funds in this part of your account in various mutual funds, stocks or bonds. When invested in this manner your account can grow; which is another part of the triple-tax advantage of an HSA. But remember, like other investments, your balance could decline in value as well.
I suggest that you leave a balance sufficient for expected medical expenses and move any balance above that level into the investment part of your account. Look for a target date based mutual fund option that matches your anticipated retirement date (such funds balance the risk and return of the investment according to your age, getting more conservative as you approach the point where you are more likely to use the funds). In my opinion, an HSA is designated for future medical expenses and isn’t appropriate for high-risk investing.
If unexpected medical expenses occur, you can move funds from the investment part of the account back into regular part or the account. This process does require selling off some of your investments and may take a day or two to complete the transaction, so plan ahead.
During the year, if you are actively contributing to your HSA, you will want to keep an eye on the amount funds in each part of the account. If your balance in the primary part of the account exceeds your expected needs, you should consider moving any extra dollars over to the investment side to get a higher return on your money.
Summary
If you have questions about the specific rules for your FSA or HSA, reach out to the account record keeper’s website or call for further information.
The important point is to make sure that you are either using or saving the dollars you have contributed appropriately.
Written by Brian Mitchell
Brian Mitchell has experience leading Total Rewards strategy and implementation for large employers.
Benefit Boosts by Brian Mitchell© – Vol 2024-017
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