You might have heard about a lot of hype about the different types of health savings accounts/medical savings accounts, but what exactly are they? Perhaps you learned that you can be exempt from tax by using a particular type, or that flexible spending accounts are a good choice to accompany your health insurance plan.
An FSA, short for flexible spending account, is one of several tax-advantaged financial accounts in the United States. Employees are able to deposit part of their earnings to later fund qualified expenses through their FSA. Usually, funds are used for medical expenses but may also be used for healthcare and other expenses.
There are a number of different types of FSAs. The most commonly used is the medical FSA, which is similar to a health savings account but differs in a few ways. While health savings accounts are usually parts of a consumer driven health care plan, medical FSAs are usually included in traditional plans as well.
Funds in one’s FSA are usually used for items that are not paid for by one’s insurance. For example, you might use funds on deductibles, co-payments, and co-insurance for your health insurance plan.
One disadvantage to a flexible savings account is that you must spend deposited money within a “coverage period.” Under most plans, this is the calendar year, but it could run up to a whole year if you are offered a “grace period.” Any money that you do not spend is lost to your employer, known as the “use it or lose it” rule. Also, it is important to understand that you must pay taxes even on forfeited funds. Studies have shown that employees lose an average of $100 in forfeited funds each year in their flexible spending accounts.
So, what do I do if I am worried about losing money to my employer? The good news is that this “use it or lose it” rule does not apply to health savings accounts (HSAs). If you do not feel comfortable about losing any unused funds at the end of the year, a health savings account may be a better choice.