"Health insurance typically doesn’t cover every single cost associated with maintaining your health," says McCreary. "For example, you may have insurance that pays for an eye exam but not for eyeglasses or contact lenses."
- Colleen McCreary, chief people officer at Credit Karma
To learn the FSA and HSA meaning and learn which is best for you, keep scrolling.
FSA and HSA, explained—including how and where to spend the money
1. What is an FSA?
Short for flexible spending account or flexible spending arrangement, an FSA allows you to allocate pre-tax dollars toward certain medical expenses. FSAs are only available through an employer, and employers are not required to offer them.
"If your employer offers FSAs, you decide how much of your salary (up to a certain limit) you want to defer into the account, and your salary is reduced by that dollar amount," says McCreary. "Instead of paying you that money, your employer puts those funds into your FSA, so neither you nor your employer pays federal taxes on that money."
2. What is an HSA?
If you have a high-deductible health insurance plan, you may be eligible to contribute to a health savings account, or HSA.
"HSAs are a tax-free way to save for and pay for healthcare," says McCreary. "[It] allows you to contribute a certain dollar amount each year to use specifically for eligible medical expenses. The money you contribute to an HSA is tax-deductible, and withdrawals are tax-free—as long as you use the funds for qualified medical expenses."
McCreary adds that you can also use an HSA to invest and grow your money tax-free.
3. What are the benefits and of having an FSA and-or HSA?
"FSAs can help you pay for things like childcare and healthcare costs, and reduce the amount of income you pay federal taxes on," says McCreary. But, keep in mind that at the end of each year, any unused FSA contributions are lost. "The key is to keep an eye on your account and plan carefully so that you’re putting in the right amount each year."
With an HSA, you can deduct the contributions you make from your taxes, and any money that your employer adds to your HSA isn't reported as income. Any interest or investment earnings that the HSA gains aren’t taxed, and your withdrawals may be tax-free as long as they’re made for qualified medical expenses. Bonus: The money in your HSA remains yours even if you switch jobs or stop working.
4. Where can you spend it?
"Before you contribute money to an FSA or HSA, and before you start spending, a good first step is to talk to your company’s benefits administrator for information about qualified expenses you can pay with your FSA and-or HSA, and how that payment will occur," says McCreary.
Both accounts allow you to pay for medical expenses. Wageworks has handy breakdowns on how can spend your FSA or HSA. They can be used on anything from allergy meds and antacids to menstrual care products and alternative healers. In some cases, you'll need a prescription or letter from your doctor for certain purchases to count so be sure to check in with your employer to learn more about the specifics.
Multiple retailers have FSA and HSA shops. On the FSA Store and Amazon's FSA and HSA Shop, you can shop for everyone from Tylenol ($11) and Lola Tampons ($8) to La Roche-Posay Sunscreen ($20) and Mighty Patch ($14). Brands like Warby Parker, GlassesUSA, and LensCrafters also allow you to shop for a new pair of eyeglasses using FSA and HSA.
5. How do you spend it?
This varies depending on your employer. Some accounts let you use a special debit card, while others require you to make the initial purchase on your own and then file for a reimbursement. "Talk to your company’s benefits administrator, or call your healthcare provider, to learn more about the steps you need to take to spend your FSA or HSA," says McCleary.
6. Which one is best for you?
Because the funds in an FSA are lost at the end of the year, FSAs are great for short-term savings. While HSAs, if you qualify, are great for the long-term. Whether one or both works for you depends on your circumstances.
"Take a look at your budget and at any expected healthcare costs in the coming year," says McCreary. "It really comes down to your unique situation—how much you can afford to put into an account, what you qualify for, and how you plan to use your funds throughout the year. As with anything, read the fine print to understand what works for your healthcare needs."
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