What are HSAs and FSAs? How to Use Them and What are the Limitations?

Health savings accounts (HSAs) and flexible spending accounts (FSAs) are two common medical savings tools used to pay for healthcare expenses tax-free. Understanding what they are, how they work, and their limitations can help you use them most effectively.

What is a Health Savings Account (HSA)?

A health savings account is a tax-advantaged account that allows you to set aside pre-tax funds to pay for qualified medical expenses. To open an HSA, you must have a high-deductible health insurance plan. For 2023, that means at least a $1,500 deductible for individual coverage or $3,000 for family. You can use this for telemedicine services including Holts Healthcare as well.

You can contribute up to $3,850 to an HSA in 2023 if you have individual coverage or $7,750 for a family plan. People 55 and older can contribute an extra $1,000. HSA funds roll over year to year if you don’t spend them. The money in the account is yours to keep and grows over time.

HSAs offer triple tax advantages:

Contributions are tax deductible
Funds grow tax-free
Withdrawals aren’t taxed if used for medical expenses

HSAs can be used to pay for medical expenses like doctor visits, prescriptions, dental care, glasses, and therapy. The full list of eligible expenses is defined by the IRS.

How to Use an HSA

To use your HSA, you can pay for care and healthcare items with your HSA debit card, online bill pays, or by requesting reimbursement. You can also invest some HSA funds for greater returns over time. This includes the cost of telehealth services such as Holts Healthcare.

An HSA lets you manage and budget for your healthcare costs. Just be sure to save receipts in case you need to show withdrawals were for eligible medical expenses.

HSA Limitations and Drawbacks

While HSAs have excellent tax advantages, there are some limitations and potential drawbacks to understand:

Must have an eligible high-deductible health plan
Annual contribution limits apply
You may forfeit unspent funds if you switch health plans
Need to maintain records to avoid tax penalties
May discourage you from getting needed care to avoid costs
Not available if you have Medicaid or Medicare (with some exceptions)

What is a Flexible Spending Account (FSA)?

A flexible spending account (FSA) is an employer-sponsored account used to pay for medical costs. You elect how much to contribute from each paycheck, up to $3,050 in 2023. This money comes out pre-tax.

The full amount you elect is available at the start of the plan year. You use an FSA debit card or request reimbursements to pay for eligible healthcare expenses. Money in an FSA does not roll over. You must spend it by the end of the plan year or risk forfeiting the balance per the use-it-or-lose-it rule.

FSAs help budget medical costs for things like:

Health insurance copays and deductibles
Prescriptions and over-the-counter drugs
Dental work and orthodontia
Eyeglasses and contacts
Therapy and counseling services
Medical equipment and supplies

The list of FSA-eligible expenses is defined by the IRS.

FSA Advantages and Limitations

FSAs provide a few key advantages:

Downsides and restrictions include:

Maximize Medical Savings with HSAs and FSAs

HSAs and FSAs both provide valuable tax-free options to pay for healthcare costs. Understanding how they work, from eligibility to using the funds, allows you to take full advantage of their benefits and avoid pitfalls. Be sure to coordinate coverage with your health insurance deductible and evaluate your expected medical expenses each year. With smart planning, HSAs and FSAs can help you manage healthcare costs while optimizing savings.