What are medical expense accounts?

An FSA is an account you can put money into to pay for certain medical expenses.¹ It’s sometimes called a flexible spending arrangement. You fund an FSA with pretax dollars. That means you don’t have to pay federal income tax on the money. Usually, you don’t pay state income tax on the funds either.

You can use your FSA to pay for certain out-of-pocket health care costs. Those are expenses your health insurance doesn’t cover.

Dependent care FSAs are another type. They help you pay for things such as childcare or care for an adult family member while you are at work.

Who can have a health care FSA?

You can get a health care FSA if your employer offers it. In 2021, 43% of private industry workers and 71% of government workers had or were offered a health care FSA.² But you can’t get a health care FSA if you’re self-employed. There are also limits for highly compensated employees.³

How much can you add to your health care FSA?

For 2022, you can put as much as $2,850 into your health care FSA. Your employer can also add money. And those funds are not taxable.

At the beginning of your health insurance plan year, you’ll decide how much to put into your FSA. The total amount is divvied up across each paycheck. So you’re funding it little by little instead of all at once. But here’s the really good news: Your full yearly total will be available on day one.

You can spend your health care FSA money on many types of medical expenses. Some examples:

• Copayments (aka copays)
• Deductibles (how much you pay for health services out of pocket before your insurance company pays the rest)
• Prescription medications and over-the-counter treatments
• Medical equipment, such as crutches
• Dental and vision care expenses

You can use your health care FSA money on yourself, your spouse or the dependents you claim on your income tax return. That includes children under age 27. See "What are qualified medical expenses?" below for more ways to use your funds.

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You can’t use FSA money to pay for:

• Health insurance premiums (monthly bills)
• Long-term care
• Expenses covered under another health plan

What happens to your health care FSA money if you don’t use it all?

FSAs have a use-it-or-lose-it policy. If you don’t use all the money by the end of the year, it’s gone. There can be exceptions, though. Some employers let you use the money for an extra two and a half months. Others will let you roll over up to $570 into the new plan year.

But not all employers offer these features, so be sure to ask.

How do you know how much to add to your health care FSA each year?

Estimate your average yearly health care expenses for a few years and then add a little more. How do you do that? Optum Financial has an FSA savings calculator that makes it easy. It can help you add up your expenses and see how much money you could save.

You usually can’t change your contribution amount during the year. But if certain things in your life change, you might be eligible. Those are called qualified events. They include having a new child, getting married, getting divorced or changing jobs.

An HSA also helps you pay for certain medical expenses.³ It’s a savings account that earns interest. And you have the funds you put into it for life. You generally set up an HSA as part of your employer benefits. But you can also open one outside of an employer program. HSAs are administered by IRS-approved companies such as Optum Financial.

HSAs are the only long-term savings and retirement accounts that are triple tax-advantaged. Here’s what that means:

• The funds added to your account are pre-tax or tax-deductible.
• The interest you earn on your HSA account is not taxed.
• Money you take out of your HSA to pay for eligible health expenses is not taxed.

Who can have an HSA?

Getting an HSA is easy, if you meet the following requirements:

• You must be covered by a high-deductible health plan (HDHP).
• You must have no other health insurance. (There are certain exceptions.)
• You can’t have Medicare.
• You can’t be a dependent on someone else’s income tax return.

Unlike with health care FSAs, you can be employed, self-employed or unemployed and still get an HSA.

What is a high-deductible health plan (HDHP)?

An HDHP has a higher deductible than a typical health plan. The deductible is the amount you spend before your insurance coverage starts. With an HDHP, you’ll spend more of your own money up front before your health plan pays the rest. In 2022, plans with a deductible of at least $1,400 for a single person are considered HDHPs. For family coverage, the minimum deductible for an HDHP is $2,800. Those are the lowest amounts that qualify.

One benefit of HDHPs is that they tend to have lower monthly costs than traditional plans. Are you generally healthy? Will you not need care for an ongoing illness? If so, an HDHP may save you money.

How much can you add to your HSA?

For 2022, you can add up to $3,650 to your HSA, if you have an HDHP for yourself only. You can add $7,300 if you have HDHP coverage for your family. Both you and your employer can put dollars into an HSA.

If you’re self-employed, you, your family members and others can add to your HSA.

Remember, you can use your HSA funds for eligible costs when you want to. There’s no time limit.

And some good news: If you’re 55 or older at the end of your tax year, your HSA contribution limits increase by $1,000.

What can you spend your HSA money on?

The list of eligible expenses is long. It includes things like acupuncture, ambulance services and flu shots. (See below for more.)

You can also spend it on premiums for:

• Long-term care insurance (which helps cover the cost of care in a nursing home)
• Health care continuation coverage (such as COBRA)
• Health care coverage you have while you’re getting unemployment benefits
• Medicare or other health care coverage if you’re 65 or older

You can’t use your HSA to pay for your regular insurance premiums, though.

What happens to your HSA money if you don’t use all of it in a year?

The money in your HSA is yours to keep. So unlike with your health care FSA, you don’t have to spend it all by the end of the year.

You might also choose to use your HSA to help you once you retire. You can also use it to save for large expenses during your retirement, such as:

• Hobbies
• Travel
• Down payment on a vacation home

The catch: If you use it for a non-medical reason, it counts as income and is taxed as income.

Yes, but only in certain situations. You can have a dependent care FSA and an HSA. You can also have an HSA with a limited purpose FSA (LPFSA). That type of FSA covers a much more restricted list of expenses (such as vision and dental care).

You cannot add to both an HSA and a traditional FSA at the same time.

A medical savings account (MSA) is like an HSA. And many of the rules are the same. But there are a few important differences.

There are two types of MSAs: an Archer MSA and a Medicare MSA, which accompanies a Medicare Advantage plan.

Archer MSAs are relatively rare today. You can open one only if you work for a small employer that offers them with an HDHP.

Learn more about Medicare MSAs here.

How do Archer MSAs differ from HSAs?

These are the two important differences to know:

• Either you or your employer can add to your MSA each year. Not both.
• The dollar amount you can pay into this account is limited. It’s about 75% of the annual deductible of your HDHP. Be sure to talk to a tax adviser. Ask if you meet all the tax rules.

An HRA lets your employer pay for some of your health care expenses, on top of your salary. Only your employer can add to your HRA. Unlike with HSAs and Archer MSAs, you don’t have to report your HRA on your taxes. An HRA lets you get reimbursed, tax-free, for eligible medical expenses. And that money is not included in your gross income. And there’s no limit to how much your employer can add to the account.

What can you use your HRA money for?

You can use the money for certain medical expenses. And these expenses can be for you, your spouse or your dependents. They include:

• Health insurance premiums
• Long-term care coverage
• Expenses that aren’t covered under another health plan

These are health and medical care costs that the IRS says are tax-deductible.^1,4 Copays and prescription costs are two examples. Here are some others:  

• Acne treatment
• Acupuncture
• A ramp for your home
• At-home COVID-19 tests
• Birth control pills and condoms
• Breast pumps and supplies
• Breast reconstruction surgery
• Car mileage and lodging, if you’re traveling to get health care services
• Contact lenses or reading glasses
• Drug addiction and alcoholism treatment
• Fertility help
• Humidifiers
• Menstrual products
• Orthodontics
• Prescription sunglasses
• Some allergy medications
• Some vitamins/supplements
• Therapeutic massage (when working with your doctor)

Use our qualified medical expense tool to explore more options. It will also tell you whether you need to get a letter from your doctor proving that the product or service is necessary. In the meantime, you can stock up on hundreds of eligible HSA/FSA products and medications at the Optum Store. Shop now.

While they might seem like potential qualified medical expenses, these are not eligible:

• Babysitting or childcare (you can use a dependent care account for this)
• Controlled substances
• Cosmetic surgery
• Funeral expenses
• Future medical care
• Gym memberships
• Hair transplants
• Maternity clothes
• Swimming lessons
• Teeth whitening
• Weight-loss programs

You can learn more about medical expense accounts and eligible costs at Optum Financial. You can also:

• Talk to your employer about HSAs, FSAs, Archer MSAs and HRAs.
• Talk with an HSA trustee about HSAs.
• Ask your tax adviser about medical savings accounts and taxes.
• Visit the IRS’s website (irs.gov) and check out Publication 969 and Publication 502.

You can also ask your medical care team. At the very least, they can point you in the right direction. After all, they’re always looking out for your health and well-being.

1. Internal Revenue Service. Medical and dental expenses. Accessed June 8, 2022.
2. U.S. Bureau of Labor Statistics. Employee benefits survey: Flexible benefits in the workplace. Last modified September 23, 2021. Accessed June 27, 2022.
3. Internal Revenue Service. Health savings accounts and other tax-favored health plans. Accessed June 8, 2022.
4. Optum Financial. Qualified medical expense tool. Accessed June 8, 2022.

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