Getting an FSA or HSA: Eligibility and Enrollment

Quick answer

• Understand that FSAs are employer-sponsored and HSAs require a High Deductible Health Plan (HDHP).
• Eligibility for an FSA is determined by your employer’s benefits package.
• To get an HSA, you must be enrolled in a qualifying HDHP and not have other disqualifying health coverage.
• Enrollment periods are typically limited to annual open enrollment or qualifying life events.
• Contributions are usually made pre-tax, lowering your taxable income.
• HSAs offer triple tax advantages: pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Who this is for

• Employees whose employers offer Flexible Spending Accounts (FSAs) as a benefit.
• Individuals seeking tax-advantaged ways to pay for healthcare expenses.
• People who are enrolled in or considering a High Deductible Health Plan (HDHP) to potentially open a Health Savings Account (HSA).

What to check first (before you act)

Your Employer’s Benefits Package

Your employer is the gateway to an FSA. They decide if an FSA is offered and what types are available (e.g., health FSA, dependent care FSA). This information is usually found in your employee handbook, benefits portal, or during your onboarding process.

Your Health Insurance Plan

HSAs are inextricably linked to High Deductible Health Plans (HDHPs). You cannot open or contribute to an HSA if you have a traditional health insurance plan or certain other types of coverage. Verify your plan’s deductible and coverage details to see if it qualifies as an HDHP. Check the official source or your provider for current HDHP requirements.

Your Healthcare Needs and Spending Habits

Consider your anticipated medical expenses for the year. FSAs are “use-it-or-lose-it” for the most part, meaning you forfeit any remaining funds at the end of the plan year (though some plans offer a grace period or limited carryover). HSAs, however, are yours to keep and invest, with no annual deadline to spend the funds.

Your Other Health Coverage

Having certain other types of health coverage can disqualify you from contributing to an HSA. This includes Medicare, TRICARE, or being claimed as a dependent on someone else’s tax return. Review IRS guidelines or consult a tax professional to understand these restrictions.

Step-by-step (how to get an FSA or HSA)

1. Identify Your Employer’s FSA Offerings:

• What to do: Review your employee benefits information. Look for details on health FSAs, dependent care FSAs, or other related accounts.
• What “good” looks like: You have clear information about whether an FSA is available, its contribution limits, and enrollment periods.
• Common mistake: Assuming your employer offers an FSA without checking.
• How to avoid: Actively seek out your benefits documentation or ask your HR department.

2. Determine HSA Eligibility (If Considering an HSA):

• What to do: Confirm you are enrolled in a High Deductible Health Plan (HDHP) that meets IRS requirements. Ensure you are not covered by other health insurance that disqualifies you.
• What “good” looks like: You have a qualifying HDHP and no other disqualifying coverage, making you eligible to open and contribute to an HSA.
• Common mistake: Assuming any health plan with a high deductible is an HDHP for HSA purposes.
• How to avoid: Consult your health insurance provider or the IRS website for specific HDHP definitions.

3. Note Enrollment Deadlines:

• What to do: Mark your calendar for your employer’s annual open enrollment period. Also, be aware of qualifying life events (e.g., marriage, birth of a child, loss of other coverage) that trigger a special enrollment period.
• What “good” looks like: You are aware of the specific dates you can enroll or make changes to your FSA or HSA contributions.
• Common mistake: Missing the open enrollment window and having to wait another year.
• How to avoid: Set reminders in your calendar and review benefits communications promptly.

4. Choose Your Contribution Amount (FSA):

• What to do: Estimate your eligible healthcare expenses for the upcoming year. Decide how much to contribute to your FSA, keeping the annual maximum in mind.
• What “good” looks like: You’ve made a reasonable estimate and chosen a contribution amount that maximizes your pre-tax savings without risking significant forfeiture.
• Common mistake: Overestimating expenses and losing money in the FSA.
• How to avoid: Review your past year’s medical bills and consult your FSA administrator for a list of eligible expenses.

5. Select an HSA Provider (If Eligible):

• What to do: Research and choose a financial institution or administrator that offers HSAs. Compare their investment options, fees, and customer service.
• What “good” looks like: You’ve selected a reputable HSA provider with investment choices that align with your financial goals.
• Common mistake: Picking the first HSA provider you find without comparing options.
• How to avoid: Read reviews, compare fee structures, and look at the range of investment choices offered.

6. Complete the Enrollment/Application Forms:

• What to do: Fill out the necessary paperwork for your FSA through your employer or for your HSA through your chosen provider.
• What “good” looks like: All forms are completed accurately and submitted by the deadline.
• Common mistake: Incomplete or inaccurate forms leading to delayed enrollment or rejection.
• How to avoid: Read instructions carefully, double-check all information, and keep copies for your records.

7. Set Up Contribution Deductions (FSA):

• What to do: Ensure your employer has set up your payroll deductions for your FSA contributions according to your chosen amount.
• What “good” looks like: Your pay stubs accurately reflect the pre-tax deductions for your FSA.
• Common mistake: Contributions not being deducted correctly or at all.
• How to avoid: Monitor your pay stubs regularly and contact your HR or payroll department immediately if you see discrepancies.

8. Fund Your HSA (If Applicable):

• What to do: Make your initial contribution to your HSA, either through payroll deductions (if offered by your employer) or direct contributions.
• What “good” looks like: Your HSA account is funded and ready for use or investment.
• Common mistake: Delaying funding your HSA, missing out on potential investment growth.
• How to avoid: Set up recurring contributions or make a lump sum deposit as soon as possible after opening the account.

9. Understand Eligible Expenses:

• What to do: Familiarize yourself with the IRS list of qualified medical expenses for both FSAs and HSAs.
• What “good” looks like: You know what types of out-of-pocket costs you can pay for with your FSA/HSA funds to maximize tax benefits.
• Common mistake: Using funds for ineligible expenses, leading to taxes and penalties.
• How to avoid: Refer to the IRS Publication 502 or your FSA/HSA administrator’s guidelines.

10. Manage Your Account and Track Spending:

• What to do: Keep receipts for all eligible expenses paid for with your FSA or HSA. Regularly check your account balance and investment performance (for HSAs).
• What “good” looks like: You have a clear record of your spending and are aware of your account’s status.
• Common mistake: Losing receipts needed for substantiation or not tracking investment growth.
• How to avoid: Use a dedicated app, spreadsheet, or filing system to keep track of receipts and account statements.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Missing open enrollment	Inability to enroll in an FSA/HSA for the plan year unless a qualifying life event occurs.	Be diligent about checking your employer’s benefits calendar and setting reminders for enrollment periods.
Not understanding FSA “use-it-or-lose-it” rule	Forfeiting remaining FSA funds at the end of the plan year, losing the pre-tax benefit.	Accurately estimate medical expenses, utilize a grace period/carryover if available, and spend down funds on eligible items like over-the-counter medications.
Using an HSA with non-HDHP coverage	Ineligibility for HSA contributions, leading to taxes and penalties on any amounts contributed.	Verify your health plan meets HDHP requirements by checking the deductible minimums and maximum out-of-pocket limits set by the IRS.
Not checking HSA disqualifying coverage	Contributing to an HSA while having other coverage (like Medicare) that makes you ineligible, causing penalties.	Review IRS rules regarding other coverage that disqualifies HSA contributions. Consult a tax professional if unsure.
Spending HSA funds on non-qualified expenses	Paying income tax plus a 20% penalty on the withdrawn amount.	Keep detailed records of all medical expenses and refer to IRS Publication 502 for a comprehensive list of eligible items.
Forgetting to claim FSA reimbursement	Losing the opportunity to get reimbursed for out-of-pocket expenses paid with after-tax dollars.	Submit claims and receipts promptly before the deadline specified by your FSA administrator.
Not investing HSA funds	Missing out on significant potential tax-free growth and compounding over the long term.	Explore investment options offered by your HSA provider and begin investing contributions once you have a comfortable cash buffer for immediate needs.
Incorrectly estimating FSA contributions	Contributing too much (and losing funds) or too little (and missing out on pre-tax savings).	Review past medical expenses, factor in known upcoming procedures, and consult your FSA administrator for guidance.
Not keeping detailed receipts for expenses	Inability to substantiate expenses if audited by the IRS or your FSA administrator, potentially leading to taxes/penalties.	Implement a system for organizing and storing all medical receipts, either digitally or physically.
Failing to monitor HSA balance and investments	Missing opportunities to adjust investment strategy or not being aware of fees that erode returns.	Schedule regular check-ins (quarterly or semi-annually) to review your HSA balance, investment performance, and fees.

Decision rules (simple if/then)

• If your employer offers an FSA and you anticipate medical expenses, then enroll in the FSA because it allows you to pay for those expenses with pre-tax dollars.
• If you are enrolled in a High Deductible Health Plan (HDHP) and do not have other disqualifying coverage, then you are eligible to open an HSA because it offers triple tax advantages.
• If you have a chronic condition requiring ongoing treatment, then overestimate your FSA expenses slightly because you are likely to use the full amount.
• If you have a HSA, then prioritize investing funds beyond your immediate emergency needs because the tax-free growth can significantly increase your savings over time.
• If you are close to the end of your FSA plan year and have funds remaining, then review the list of eligible over-the-counter medical supplies and purchase items you might need to avoid forfeiting the money.
• If you have a qualifying life event (like getting married or having a baby), then you can enroll in or change your FSA/HSA contributions outside of the regular open enrollment period because this event triggers a special enrollment period.
• If you are considering an HDHP primarily to open an HSA, then carefully analyze the higher deductible and potential out-of-pocket costs to ensure it aligns with your financial risk tolerance.
• If you are unsure about whether a specific medical expense is eligible for FSA or HSA reimbursement, then consult your plan administrator or the IRS guidelines because using funds for ineligible items incurs taxes and penalties.
• If your employer offers both an FSA and an HSA (which is rare, as HSA eligibility is usually tied to an HDHP that employers may not offer alongside FSAs), then understand the trade-offs, as you generally cannot contribute to an HSA if you have a general-purpose health FSA.
• If you are over age 65, then you can still contribute to an HSA and use the funds for any purpose (not just medical), though withdrawals for non-medical expenses will be taxed as ordinary income, similar to a traditional IRA.
• If you are self-employed and have an HDHP, then you can open and contribute to an HSA because you meet the eligibility requirements.

FAQ

What is the difference between an FSA and an HSA?

An FSA is typically employer-sponsored and has a “use-it-or-lose-it” rule for funds each year. An HSA requires enrollment in a High Deductible Health Plan (HDHP) and allows funds to roll over year after year, with investment options.

Can I have both an FSA and an HSA?

Generally, no. If you have a general-purpose health FSA, you cannot contribute to an HSA. However, some limited-purpose FSAs (for dental or vision expenses only) may allow HSA eligibility.

What happens to my FSA funds if I leave my job?

You typically have a limited time, often until the end of the plan year or a grace period, to use your FSA funds or submit claims. Unused funds are usually forfeited.

Can I contribute to an HSA if I have Medicare?

No. Once you are enrolled in Medicare, you are no longer eligible to contribute to an HSA. You can, however, continue to use any existing HSA funds tax-free for qualified medical expenses.

What are some common eligible expenses for an FSA/HSA?

Eligible expenses include doctor’s visits, prescription drugs, dental care, vision care, eyeglasses, contact lenses, and certain medical equipment. Over-the-counter medications are also often eligible.

How much can I contribute to an FSA or HSA?

Contribution limits are set annually by the IRS. Your employer will communicate the FSA limit, and the HSA limit is published by the IRS. Check the official source or your provider for current figures.

What if I don’t use all my FSA funds?

Most FSAs have a “use-it-or-lose-it” policy. Some employers offer a grace period to use funds for a few extra months or allow a limited amount to be carried over to the next year. Check your plan details.

Can I invest my HSA funds?

Yes, most HSA providers offer investment options. This allows your savings to grow tax-free, which is a significant advantage for long-term healthcare planning.

What is a High Deductible Health Plan (HDHP)?

An HDHP is a health insurance plan with a higher deductible than traditional plans. It is a requirement for opening and contributing to an HSA. The IRS sets specific minimum deductible and maximum out-of-pocket limits for HDHPs.

What this page does NOT cover (and where to go next)

• Specific contribution limits for the current year (check IRS or plan administrator).
• Detailed tax implications beyond general pre-tax benefits (consult a tax professional).
• Investment strategies for HSA funds (research investment planning).
• Specific details of dependent care FSAs (review your employer’s benefits).
• Rules for FSAs or HSAs in specific states or for non-US residents.
• How to file claims or manage your FSA/HSA account day-to-day (refer to your administrator’s resources).