FSA, the picky and powerful cousin of HSA:
If HSA is a golden retriever, FSA is a cat. It’s pickier and not everyone’s cup of tea.
If you’ve been reading up on financial independence and early retirement (FIRE), you’ve definitely come across Health Savings Account (HSA) as the ultimate retirement account. And almost all posts refer to Mad Fientist’s great article on it. I’m not going to repeat what he says in detail, you should read his brilliant article for yourself (see bottom of the page for link).
To summarize it with 2018 numbers, choose a high deductible health plan (HDHP) that has HSA, and max it out (self-only: $3450; family: $6900) since it’s a pre-tax contribution (lowering your taxable income) and your money will grow tax-free. You can pay your medical costs from your after-tax money, save the receipt and pay yourself back in your early retirement with minimal fees. Now, are there any other tax-advantaged vehicles we could use to lower our income more AND free up some after-tax money for investment that would otherwise be spent on certain medical expenses? That’s the goal of us FIRE folks, right?
Well, my fellow ecomonks, that is where a Flexible Spending Account (FSA) might be able to help you. Before you build up your hope too much, let me clarify that an FSA has limitations that make it not applicable to everyone. See IRS publications 502 and 969 and section 213 (d). Main FSA downside is its use-it-or-lose-it feature. If you don’t use the FSA money by the end of the year, you’ll lose all or most of it (some plans allow you to roll over up to $500 to next year, but any amount over $500 will be lost). So it requires planning a medical procedure or need, and estimating what it costs which can be difficult. You’ll need to put money in the FSA at the open enrollment period the year before. For some recurring medical costs like vision and dental, this can be more predictable and applicable as you’ll see here:
You should make sure you talk to your health plan representative and do your research before committing to it. I’m here to share with you what I found out for my particular case:
I have been wearing glasses for most of my life. Being an active person, it’s usually inconvenient and costly to switch between contacts and glasses, considering that daily contacts are expensive. That’s why I’ve always fantasized about getting LASIK surgery, seeing how fast their technology and instruments have advanced. The high cost (ranging between $3k-$5k), combined with my glasses prescription not stabilizing until recently prevented me from doing it. My ecomonk/ey partner went through the procedure this year and saw the amazing results first hand, and tempted me to do the same. Having been following FIRE and developing the mindset, I was wondering if there was a way that would allow me to keep my HSA untouched and growing and yet get some tax benefits. And I found FSA.
No wonder it wasn’t talked about much, it’s a complicated and limited option. I got different answers, on whether I could use it or not, from two HR representatives of my company and the representative of the FSA provider. They contradicted each other, and some of my research findings. That’s what led me to writing this post and sharing with y’all what I found.
Quick info on FSA: There are three types of FSAs — Health Care, Limited Health Care and Dependent Care. Your FSA contributions come out of your paycheck before taxes are withheld. That reduces your taxable income, which means you pay less in taxes overall. In most cases, your money is also exempt from state and local taxes. You also pay no taxes or penalties when you use the money for qualified expenses. Check with your tax advisor or HR representative for more information as plans can vary. But the trick is that if you don’t use the money in your FSA by the end of the year, you’ll lose it (well, most of it).
Some HDHPs, like the one I’m on, allow you to have a Limited Health Care FSA (and a Dependent Care FSA) in addition to an HSA.
Question 1: Is LASIK eligible for FSA?
The answer is YES (look at the IRS codes mentioned above for details. Generally, most dental and vision costs are).
Question 2: When can I use the money in my FSA account (electing in Dec 2017 for 2018)?
Full amount of FSA will be available as soon as Jan. 1 2018, even though I’ll be contributing to it from my monthly paychecks throughout the year.
Question 3: Can I use the money in FSA to pay for this medical cost?or do certain conditions need to be met before I can do that?
The HRs I talked to said that I need to wait until my plan deductible is met before I can use FSA, which is not correct since LASIK isn’t covered in my plan and deductible doesn’t apply to it. So, I did some research and this is what I found (the 2016 information brochure of my FSA provider):
“If you’ve enrolled in the XX High Deductible health plan and also make or receive contributions to a Health Savings Account (HSA), you can also have a Limited Health Care FSA. You and your spouse can’t have a standard Health Care FSA while you have an HSA. Your Limited Health Care FSA can reimburse you for eligible dental, vision and certain preventive care expenses that you and your spouse, tax dependents and qualifying adult children (up to age 26) incur during the plan year before you meet the XX health plan annual deductible or, if lower, the IRS minimum annual deductible amount ($1,300 for self-only or $2,600 for self + family). Once the annual deductible limit is satisfied, you can use your Limited Health Care FSA for all eligible health care expenses.”
“Your employer will deduct the amount you elect from your paychecks throughout the year and FSA provider will deposit your entire election into your Limited Health Care FSA at the beginning of the plan year. As you incur eligible expenses, you can reimburse yourself with tax-free money as allowed for a Limited Health Care FSA.”
Eligible expenses
Before you meet the annual deductible limit: You can only use your Limited Health Care FSA for:
- Dental care – Orthodontia, fillings, X-rays, braces, caps, mouth guards, etc.
- Vision care – Routine exams, eyeglasses, contact lenses, solutions and supplies, LASIK eye surgery, etc.
- Preventive care – Includes coinsurance amounts for certain preventive medications covered under the XX high deductible health plan that are not subject to the annual deductible.
After you meet the annual deductible limit: You can use your Limited Health Care FSA for all eligible health care expenses.
Dependent Care FSA
Set aside up to $5,000 for work-related day care expenses. You can set aside up to the maximum of $5,000 on a pretax basis into your Dependent Care FSA. Then use that money to pay for work-related day care expenses. This means you need the day care so that you (or if married, you and your spouse) can work. You can’t claim dependent care expenses that aren’t work-related, such as the cost of a Saturday night babysitter.
Some more information about FSA on Vanguard.
| Health Savings Account
(HSA) |
Flexible Savings Account
(FSA) |
|
| Pre-Tax Contribution (lowers taxable income) | Yes | Yes |
| Contribution limit (2018) | $3450 – single
$6900 – married |
$2650 – LPFSA
$5000 – DCFSA |
| Do unused funds remain in the account (and won’t be lost)? | Yes | No*
(*<$500 rolls over in some plans) |
| Can you invest the money in the account? | Yes | No |
| Is the full amount available immediately? | No
(the $$ must accumulate in your HSA before you can use it) |
Yes |
LPFSA = Limited Purpose FSA
DCFSA = Dependent Care FSA
Conclusions:
For eligible dental and vision care, you can use FSA in a High Deductible Health plan with HSA contributions before you meet the annual limit. Some of these cases can be predictable, and if not urgent, can be planned for. Take braces, fillings, X-rays, mouth guards, glasses, contacts and LASIK. I have had minor fillings that weren’t urgent but cost me about $300-400, if I knew about FSA I could’ve used it to save on taxes. If you’ve had a root canal or crown, you know it can cost over $1000, which makes FSA another good option (if you can wait a few months until your new enrollment goes thru). Health related expenses are personal and specific, so make sure you plan ahead and talk to your HR representative before you choose FSA. At the time I’m writing this, the Senate and House are talking about tax reform changes that affect these numbers or strategies.
Back to my plan of using FSA for LASIK: I’ll reduce my taxable income by $2650 (contribution limit for 2018), and at 25% tax bracket you’re saving $663. Even though I’ll be making paycheck contribution throughout the year, I will be able to use all of the FSA amount by January 1, 2018 for my surgery.
So, for 2018 our taxable income is reduced $6900 (HSA, married) and $2650 (FSA) = $9550 sheltered from taxes. Not bad!
What is your experience with FSA and HSA? Have you used the Limited Purpose FSA or the Dependent Care FSA?
Resources:
MadFientist’s post on HSA
United Health Care (Comparison chart)