- The Money Minute
- A Special Guest Wants to Know: “Are FSAs Worth the Trouble?”
A Special Guest Wants to Know: “Are FSAs Worth the Trouble?”
Saving receipts are a pain in the butt… do we have to do it?
Today’s article was inspired by another creator, editor-in-chief of Entrepreneur magazine, Jason Feifer (check out his stellar newsletter here!). Jason and I co-host a podcast, Help Wanted, and he’s been my work hubs ever since. I love him dearly, and you’re about to see why. A little while back, completely out of the blue, Jason sent me this voice note:
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Isn’t he just the most lovable? So, I wanted to share with you what I told Jason. First, I texted him and said “Yes, so happy to talk about this for days... but Jason, you mean FSAs, not HSAs.”
FSA? HSA? WTF?
FSA stands for flexible spending account while HSA stands for health savings account. Both FSAs and HSAs are accounts that you fund with a portion of your pre-tax income. You can use these funds on medical expenses, and because you’re using pre-tax money, you can essentially think of these purchases as discounted. It’s estimated that you can save around 30% on medical purchases through FSAs or HSAs. There’s a certain limit to how much money you can contribute, of course, but that money is yours to use for the year on eligible medical purchases. Most costs you incur at a hospital are eligible, of course, but a good amount of the things you might already have in your bathroom are eligible; things like first aid kits, sunscreen, allergy meds, chapstick, tampons and condoms.
What’s the upside?
Generally, what makes FSAs and HSAs useful is rooted in the principle of pre-tax benefits. Let’s say your annual pay is $50,000. If you decide to forgo the FSA or HSA option, then, come tax season, Uncle Sam is presented with all $50,000 of your monies. That could mean that after taxes, you’re taking home about $38,000. Oof.
Now, come the medical expenses. After covid tests, hospital check-ups and trips to the pharmacy, let’s say that you spent around 2,000 bucks on medical care. So when all is said and done, you have $36,000 left in your pocket.
Now let’s look at the same example, but you have a FSA or HSA. Let’s rewind to when we were looking at your gross annual pay, $50,000, before Uncle Sam gets to touch it. Because you have a FSA, you get to contribute the $2,000 that you expect to spend on medical expenses before Uncle Sam has a chance to tax the hell out of you.
So, once you scoot that $2,000 over to your FSA account, the IRS gets to tax your adjusted pay: $50,000 minus your FSA contribution, leaving them with $48,000 to work with. Assuming that same tax rate, after taxes, you’ll be left with $36,600 in your pocket.
In the non-FSA example, you only had $36,000 in your pocket after taxes. So, you just saved $600!
How are FSAs and HSAs different?
There are some key differences between FSAs and HSAs. In general, HSAs can be a bit of a more exclusive club. That is, in large part, because there are more eligibility requirements for HSAs than FSAs. To be admitted into the HSA clique, you need to be enrolled in a high-deductible health plan. And, if you’re enrolled for Medicare and/or you can be claimed as a dependent on someone else’s task return— well then, according to the HSAs, you can’t sit with us.
For a FSA, the only barrier to entry is that FSAs need to be set up by an employer. And for all of us self-employed folks, business owners can only contribute to an FSA if they own less than 2% of the company.
But, while HSAs have more hoops to jump through for enrollment, the payoff can be better than with FSAs. Because— and here’s how I knew Jason was ranting about FSAs, and not HSAs— with HSAs, any unused funds in your account at the end of the year, rolls over to the next year.
With FSAs, for the most part, unused money does not roll over. Although, some health plans allow a little bit of carry-over. In 2020, the maximum you could carry over in the New Year was $500. But in 2021, that carry-over maximum was bumped up to $550 because, you know, it was a pandemic. But still! If you contributed $2,000 and touched none of it— even with the $550 carried over— you still lost $1450! So in some ways, the HSAs are actually more flexible than the so-called “flexible savings accounts.” You gotta love finance jargon.
Also, you can contribute more to your HSA than your FSA. In 2021, the amount you can contribute to your HSA as a single, unmarried person is $3,600, while with a FSA, the contribution limit is $2,750.
I’m sold on FSAs. How much should I contribute?
It’s a bit of a dance here. Because, the more you get to contribute, means the less adjusted income Uncle Sam can tax you on, and we like that. But on the other hand, if you’re maxing out your FSA at $2,750, but you only spend $1,000 a year on qualified expenses, you’ll have $1,750 of unused funds. And remember— most of it doesn’t roll over, so you’ll be panic-ordering hundreds of bandaids on the reimbursement deadline.
And Jason’s other gripes are totally valid too, by the way. Yes, the website sucks, and there’s not much we can do about that; and yes, it’s a pain in the ass to keep the receipts, but, hey, one of the things that makes money valuable is that you have to work for it, right?
And on Jason’s question about whether all this hullabaloo was worth it: well, is a 30% discount worth your sanity? That’s a question only you can answer, my friend!
If you do decide to go the FSA route, here’s my recommendation to make your life a little easier (before you end up like Jason who’s sending me voicenotes titled “Fuck HSAs”): instead of worrying about keeping paper receipts around, I’d take a photo of the receipt as soon as you have it and create an album on your phone just for these receipts. The website may look like it's from the '90s, but if you use this digital receipt method, you can take FSAs into this decade.