What is fsa and hsa eligible mean

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1 Plans vary, but this is how an HSA generally works. You cannot open an HSA if, in addition to coverage under an HSA-qualified High Deductible Health Plan ("HDHP"), you are also covered under a Health Flexible Spending Account (FSA) or an HRA or any other health coverage that is not a HDHP. Prior to enrollment with an HSA provider, you must certify that you have enrolled or plan to enroll under a HDHP and are not covered under any other health coverage that is not a HDHP. Please refer to your plan documents, including specific information on your HSA, or contact your employer for more information on what’s covered and not covered by the plan. The HSA provider and/or trustee/custodian is solely responsible for all HSA services, transactions and activities. Cigna and your employer are not responsible for any aspects of the HSA services, administration or operation

2 You may not enroll under this option if you are considered self-employed (including partners and more-than-2% shareholders in a subchapter S corporation). Please refer to your plan documents, including specific information on your HRA, or contact your employer for more information.

3 A High Deductible Health Plan (HDHP) is a health plan which typically has lower premiums/plan contributions and higher deductibles than a traditional health plan. You cannot open an HSA if, in addition to coverage under an HSA-qualified HDHP, you are also covered under a Health Flexible Spending Account (FSA) or an HRA or any other health coverage that is not a HDHP. Prior to enrollment with an HSA provider, you must certify that you have enrolled or plan to enroll under a HDHP and are not covered under any other health coverage that is not a HDHP. The HSA provider and/or trustee/custodian is solely responsible for all HSA services, transactions and activities. Cigna and your employer are not responsible for any aspects of the HSA services, administration or operation.

4 To be eligible for reimbursement you must be working, looking for work, or going to school. If you have a spouse or partner, they must also be working, looking for work, or going to school.

5 HSA contributions and earnings are not subject to federal taxes and not subject to state taxes in most states. A few states do not allow pretax treatment of contributions or earnings.

6 Some cities and municipalities may impose income taxes on FSAs. For detailed information please contact your local department of taxation.

Everyone understands that healthcare is a huge chunk of their budget. One reason: prices for services and health insurance premiums rise every year. United States spending on healthcare per capita has increased more than 31-fold in the last four decades, based on an analysis from the Kaiser Family Foundation, which used data from the National Health Expenditure. In 1970, healthcare spending per person was $353. In 2019, it was $11,582. Translated into 2019 dollars, the increase was about 6-fold, from $1,848 In 1970 to $11,582 in 2019.

Along with sharply rising prices have come changes in how individuals are asked to allocate their healthcare dollars. In the 1970s, health reimbursement accounts (HRAs) were created to help offset rising health care costs. Flexible spending accounts (FSAs) for medical expenses, part of a major piece of tax legislation in 1978, were intended to help combat some of the drawbacks of the HRA, namely that employees could not contribute to them.

The arrangements were quickly added to a range of pretax employee benefit choices, and these plans became known as cafeteria plans because of their similarity to choosing different menu items in a cafeteria. Health savings accounts (HSAs) were created in 2003 so that individuals covered by high-deductible health plans (HDHP) could receive tax-preferred treatment of money saved for medical expenses.

The primary differences between HSAs and FSAs are that an FSA is employer-owned and less flexible; withdrawals are not allowed and contributions cannot be rolled over to the next year, while an HSA is controlled by an individual and is more flexible; withdrawals are allowed with a penalty and contributions can be rolled over to the next year.

When choosing benefits during open enrollment it pays to scout the choices carefully. Depending on your situation, a high-deductible health plan paired with an HSA might work well—or might be too costly. Run the numbers using an online calculator. If you are able to take advantage of a health reimbursement account, an FSA, or some of the other choices, that can be a way to reduce your tax burden.

Here’s a look at the differences between the two most common accounts, HSAs and FSAs, in more detail.

Key Takeaways

• Health savings accounts and flexible spending accounts are two fringe benefits offered by some employers that allocate pre-tax dollars for special purposes.
• HSAs and FSAs, while structurally similar, are intended for different purposes and must be used accordingly.
• Contributions to HSAs are made with pre-tax dollars and are associated with high-deductible health insurance plans to help defray some of the high-deductible costs and can be rolled over each year.
• Contributions to FSAs are also made on a pre-tax basis and cover a wider variety of activities, such as child care if you designate the account as a Dependent Care FSA, but you must use-it-or-lose-it.

Health Savings Account (HSA)

An health saving account (HSA) is offered by employers in conjunction with a high-deductible health plan (HDHP). Self-employed people who have high-deductible plans can also set up HSA accounts.

The employer or self-employed individual deposits all or a portion of the deductible into an HSA to cover costs until the deductible is met and the health insurance policy takes over the financial burden.

Once the account is set up, an employee can contribute additional money to the HSA via a payroll deduction from gross income. The money contributed to an HSA account is made with pretax dollars, which reduces the amount of income reported for tax purposes. Interest or earnings on the money in the account is also tax-free.

HSA withdrawals used to pay for qualified medical expenses are tax-free transactions.

Flexible Spending Account (FSA)

A flexible spending account (FSA) is similar to an HSA, but there are a few key differences. For one, self-employed individuals aren't eligible.

One of the biggest benefits of an FSA is that it can be set up as a Dependent Care FSA (DCFSA) to allow withdrawals for childcare expenses. It is also possible to have a separate, regular FSA to cover medical expenses depending on your company's plan.

Like the HSA, you can contribute to an FSA using your gross pay, making the contributions tax-free. As long as you use the funds to pay for qualified medical expenses, you probably won't owe taxes on withdrawals.

How Do You Qualify for an HSA or FSA?

Self-employed people can open an HSA but not an FSA. To be FSA or HSA eligible, you have to meet specific guidelines. Following are some of the things you'll need to consider before taking the steps to open your own account.

HSA vs FSA: Key Differences

A withdrawal from an HSA can be used for a broad range of medical expenses including eyeglasses, contacts, chiropractic care, and prescription drugs as well as doctor visits and hospital stays.

The HSA is a portable account so you keep your money even if you switch jobs. To qualify for an HSA, you have to be enrolled in a high-deductible health plan. In most cases, you are not eligible if you have other health coverage or can be claimed as a dependent by someone else.

Aside from setting up your FSA as a DCFSA, which allows withdrawals for eligible childcare expenses, you can also have a separate, regular FSA to cover medical expenses depending on your company's plan.

Like the HSA, you can contribute to an FSA using your gross pay, making the contributions tax-free. As long as you use the funds to pay for qualified medical expenses, you probably won't owe taxes on withdrawals.

The table below shows the differences and similarities between both health accounts:

Special Considerations

Unlike an HSA, you have to declare how much you would like your employer to deduct from your gross pay to fund your FSA in each calendar year. Once that declaration is made, you generally can't change it.

If you declined the FSA during the open enrollment period, you'll likely have to wait until the next open enrollment.

Your declared funds must be spent within the tax year, although a grace period is sometimes granted. The money you contribute can be lost if you don't spend it all by the deadline.

You don't have to be covered under a health insurance policy to be eligible, but FSA funds are not an adequate substitute for health insurance. You also can't use an FSA to pay for your health insurance premiums. If you can't afford both, it would be better to put those funds toward health insurance.

The Bottom Line

If you meet the eligibility requirements, an HSA is typically a better choice for most, because you can contribute a higher amount and unused funds roll over to the following year. If you are enrolled in a high-deductible health plan that meets the rules of eligibility established by the IRS, you are free to enroll in an HSA either through your employer or on your own.

Still, many companies offer both HSA and FSA plans. Under certain conditions, you may be able to sign up for both. In either case, establishing a medical savings plan can represent significant annual tax savings depending on your tax bracket. If you establish an FSA, just keep an eye on the account to make sure you don't let any accrued money expire at the end of the year.

The eligibility requirements, allowable contributions, and rules for medical savings plans are established by the IRS. You can reference these details in IRS publication 969.

What is the difference between and FSA and HSA?

What is considered FSA eligible?