HSA Owners Can Relax during Annual "Use It or Lose It" Spending Sprees

Health Savings Accounts don't include one of the features of Health FSAs that impedes enrollment.

This time of year, news feeds include articles with themes like "surprising things you can buy with your Health FSA" or "how to spend your FSA money before it expires." Your employer or Health FSA administrator may have notified you via e-mail, text, or banner ad that it's time to spend your 2022 balance (assuming your plan runs on the calendar year, as a majority of Health FSAs do). The goal is to avoid forfeiting unused 2022 balances.

Forfeiture Is a Federal Requirement

Under federal tax law, unused Health FSA (and Dependent Care FSA as well) balances are subject to forfeiture at the end of the plan year. Federal tax law has been amended twice this century to reduce the likelihood of a participant's losing unspent funds:

Grace period. This provision allows participants up to an additional two months and 15 days to spend their annual election. Think of it as a limited additional period to spend an unlimited amount of the remaining election. By giving participants 14.5 months to incur qualified expenses, the grace period reduces the likelihood that an optimistic election or an unanticipated reduction in the amount of qualified goods and services purchased leaves a participant with an unused balance. It's also great for participants who anticipate reimbursing an expensive qualified service like vision-correction surgery. By scheduling the surgery during the grace period, the employee or qualified dependent can use the prior year's (grace period) and current year's election to pay the bill in full. Employers can add a grace period to both a Health FSA and a Dependent Care FSA.

Limited carryover. Employers can allow participants to carry over up to $570 of their 2022 election into the following plan year (the figure for 2023 plan years is $610). This figure changes annually and is always equal to 20% of the maximum election (which is adjusted annually for inflation). Think of it as an unlimited time to spend a limited amount of that year's election. Employees who monitor their balances can adjust the following year's election to reflect the value of the projected carryover. This provision also eliminates the risk for every employee to elect up to at least $610, as the full election rolls over year after year if qualified expenses are less than that figure. The carryover provision applies to Health FSAs only.

Health Savings Account Options

Health Savings Accounts include neither the grace period or the limited carryover due to the differences in the designs of Health Savings Accounts and Flexible Spending Arrangements. FSAs are annual (they have a specific plan year) reimbursement plans sponsored by employers (the self-employed and individual business owners can't participate). In contrast, Health Savings Accounts are personal financial accounts owned by an individual (even if the program is run through an employer who establishes a relationship with an account administrator and contributes to the Health Savings Account).

Health Savings Accounts don't have a defined plan year (although contributions are always tracked on the calendar year, even when the medical plan renews mid-year or a new enrollee joins after Jan. 1). Thus, the concept of a grace period - extending the plan year to allow additional time to spend elections - doesn't apply. In fact, unlike FSA participants, Health Savings Account owners don't make annual binding elections to fund their accounts. Owners can prospectively adjust their contributions - even their pre-tax payroll deductions - as their reimbursement needs or financial circumstances change.

And the absence of a plan year means that employers can't offer a limited carryover of unused Health Savings Account funds into the next plan year. In fact, because there is no plan year, Health Savings Account owners can carry over an unlimited balance each year without affecting their applicable contribution limit for the following calendar year. A small percentage of account owners leverage this benefit to accumulate six-figure balances to reimburse qualified expenses in retirement. For many others, having an unlimited carryover means that they can fund their accounts aggressively without feeling pressure to spend balances at the end of the year, as Health FSA participants do.

Health FSA or Health Savings Account?

Many Americans don't have a practical choice between participating in a Health FSA and owning a Health Savings Account.

• Purchasers of nongroup plans and business owners can't participate in a Health FSA, which is sponsored by companies for the benefit of employees.
• Working seniors who are enrolled in any Part of Medicare (including anyone collecting Social Security benefits after a 65th birthday) is disqualified from funding a Health Savings Account.
• Employees who aren't offered or forego enrollment in an HSA-qualified medical plan can't open or fund a Health Savings Account.

For employees who have the option of either a Health Savings Account or a Health FSA, it's important to determine which combination of medical coverage (different payroll deductions and out-of-pocket financial responsibility) and reimbursement plan (including employer contributions to a Health Savings Account) makes more sense financially.

Each account has benefits relative to the others. A Health FSA is a terrific annual reimbursement account with few eligibility requirements other than being a benefits-eligible employee. A Health Savings Account offers more flexibility and the opportunity to build an emergency medical account to pay for expenses in the near or long-term future. But eligibility to open and fund an account is tied to certain requirements around medical coverage.

The Bottom Line

Yes, each reimbursement program has its advantages. And one of the benefits that Health Savings Account owners enjoy is not having to think about how to spend the last $50 or $750 of their balance before the end of the plan year. They understand - we hope - that they can preserve their balances to reimburse qualified expenses that they incur next month, next year, or decades into the future.

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