The health savings account
You qualify for an HSA only while enrolled in an HSA-eligible high-deductible health plan, with no other disqualifying coverage, and while nobody claims you as a dependent. Contributions made through payroll escape income tax and Social Security and Medicare taxes as well, and contributions you make directly are deductible on your return. The account belongs to you. It follows you from job to job, the balance rolls over without limit, and most providers let you invest it once it passes a threshold such as $1,000.
Money withdrawn for anything other than medical costs before age 65 is taxed and penalized a further 20 percent. After 65 the penalty ends and such withdrawals are taxed like those from a traditional IRA. The annual contribution limit is adjusted by the IRS most years, it is higher for family coverage, and employer contributions count toward it. The current figure appears in IRS Publication 969.
The flexible spending account
An FSA is offered by an employer alongside any type of plan. You elect a yearly amount during open enrollment, it is deducted before tax in equal slices, and the entire election is available to spend on the first day of the plan year. Unspent money is forfeited at year-end. An employer may soften this with a grace period of up to two and a half months or a limited carryover, but never both, so read your plan. The election is locked for the year unless you have a qualifying life event, and leaving the job generally ends access. A dependent care FSA is a separate account that pays for daycare, preschool and day camp for children under 13.
Holding both
You generally may not contribute to an HSA while covered by a general-purpose health FSA, and a spouse's FSA counts. A limited-purpose FSA restricted to dental and vision costs is allowed beside an HSA.
What counts, and the receipts
Deductibles, copays, prescriptions, dental work, glasses, contact lenses, over-the-counter medicines and menstrual products all qualify, and IRS Publication 502 has the full list. Cosmetic procedures and gym memberships do not. Size an FSA by totaling last year's predictable costs and electing slightly less.
An HSA has no reimbursement deadline. You may pay a bill out of pocket, leave the account invested, and repay yourself years later for any expense incurred after the account was opened, provided you kept the receipt.
Note A few states, California and New Jersey among them, tax HSA contributions and earnings on the state return. Check your state's treatment before counting on the full benefit.
