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How To Use HSA Dollars Before They’re In Your Account
Flexible spending accounts (FSAs) and HSAs are both tax-advantaged savings accounts that allow you to pay for qualified medical expenses tax-free. One perceived advantage FSAs have is that you can use your funds immediately, while with HSAs, you have to wait until those funds are actually in your account. However, with a simple trick, you can take advantage of your HSA funds’ tax benefits before you contribute them.
If your employer offers an FSA program, they’ll ask you at the beginning of your plan year how much you’d like to put into your FSA for the year. Once you tell them an amount, your employer adds that amount into your FSA, all of it at once. Your employer will then withhold money from your paychecks (usually, every paycheck); those deductions will add up to your annual election.
This means you don’t have to wait until you’ve “paid for” your FSA funds through payroll deductions to use them; you can spend all your annual election as soon as it’s in your account. Say you wanted to contribute $1,200 to your FSA this plan year. Your employer will put the $1,200 in your account and withhold $50 from each of your paychecks (if you’re paid twice a month). If you have a $200 medical expense immediately after your plan year starts, you could take $200 from your FSA to pay for it, regardless of how much your employer has withheld from your paychecks.
However, you can’t adjust your FSA annual election once you’ve chosen it, even if your medical needs change during the year. Also, FSAs don’t roll funds over from year to year, so you have to spend your funds each year or you’ll lose them (although some employers allow a grace period or rollover of up to $500). Finally, FSAs are owned by employers, so you can’t take funds with you when you switch jobs or retire.
With HSAs, your total annual contribution doesn’t automatically go into your account at the beginning of your plan year; you have to make contributions to add funds. Unlike FSAs, there’s no fixed contribution level, so you can choose how much or how often you contribute as your needs change. Also, HSAs don’t have use-it-or-lose-it limits, and your funds stay with you when you change jobs or leave the workforce.
In theory, you could make your total annual contribution at the beginning of your plan year and have those funds available to use immediately. However, that option isn’t financially realistic for everyone. But HSAs have a trick that will let you still enjoy tax savings on qualified medical expenses before you have the funds in your account.
HSAs don’t have a time limit on when you have to reimburse yourself for an eligible expense. As long as you show proof that your expense was a qualified medical cost, you can pay yourself back years or even decades down the road.
Say you open an HSA in July and plan to contribute $100 every month. However, you then incur a $200 medical expense while you only have $100 in your account. If you pay for that $200 expense out of pocket and keep your receipt, you can wait until you have $200 in your HSA, then reimburse yourself tax-free for your earlier expense. You’ll enjoy the same tax savings as you would had you paid for the medical expense up-front with your HSA.
If you have the funds, you could even pay for years of medical expenses out of pocket and invest your HSA funds, then reimburse yourself years later once your funds have had a chance to grow. It’s up to you! As long as you document your qualified medical expenses, HSA reimbursement can be your ticket to huge savings.
FSAs allow you to pay tax-free for qualified medical expenses once your plan year starts and your annual election goes into your account. HSAs let you reimburse yourself tax-free by paying out of pocket and keeping your receipts if your HSA funds are low. However, HSAs also allow you to roll over your funds with no restrictions, invest them, and take them with you when you change jobs or retire (see a full HSA/FSA comparison). If you’re looking to save money on your medical expenses, HSAs are the hands-down choice.
Ready to enroll in an HSA? Start the enrollment process here.