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HSA and FSA: How Your Health Plan Impacts Your Taxes

Unprecedented medical bills can burn a major hole in your wallet. However, two special accounts, including a flexible spending account (FSA) and a health savings account (HSA), can help in paying both doctor and tax bills.

HSAs are accounts you can set up yourself. FSAs, on the other hand, are set up by your employer and both you and your employer can fund them.

In this article

While a majority of taxes are unavoidable, there are some options available for those seeking a tax-beneficial safety net. Two of the most common safety nets include Health Savings Account (HSA) and a Flexible Spending Account (FSA).

Both FSAs and HSAs aim at setting a certain amount of pre-tax dollars aside for specific purposes such as medical, vision and dental expenses you may have to face during the course of your plan.

The major difference is that HSAs are accounts you can set up yourself. On the other hand, your employer sets up your FSA and both you and your employer can fund it. 

What is a flexible spending account (FSA)?

A health flexible spending account (FSA) is an organization account that you can use to pay for certain medical expenses, such as prescriptions and insurance copays among other things. Both you and your employer can contribute to the account as a payroll deduction from your salary. In return, the IRS approves not taxing that amount of your salary dedicated to the FSA.

The IRS has established a maximum amount that one can contribute to an FSA every year. In 2022, the FSA contribution was $2,850 ($237.50 per month). In 2023, the contribution limit is $3,050 (about $254 a month).

A potential benefit of an FSA is that funds can be used for childcare expenses, besides costs incurred in health-related. products and services.

What is a health savings account (HSA)?

A health savings account (HSA) can be used by the taxpayer to pay a number of medical expenses. Note that only people with a qualifying high-deductible health plan are eligible for the reductions. As a result, contributions made to an HSA are tax-deductible. Once your HSA is set up, you can dedicate additional money to the account with automatic deductions from your paycheck and remember, all money contributed to the account is tax deductible. 

The IRS’ maximum limit one can contribute to an HSA also depends on inflation. In 2023, the limit has been set for self at $3,850 and for a family at $7,750.

It is a good option for those who are seeking a health plan and have funds for them, even if they decide to pursue a different career or employer.

How to make a contribution to an FSA or HSA

FSA: As soon as you set up a flexible savings account at your workplace, the contributions are automatically deducted from your paycheck and transferred into the health account every salary period. 

HSA: If you make a direct HSA contribution, you may be able to claim a tax deduction for the amount while filing your return.  In addition, if your health savings account is based on a high-deductible health plan applied through work, it is possible that your employer set up dedicated payroll deductions on your account. It will mean that the money will go into your health savings account tax-free.

How does an FSA or HSA help in tax-saving

Making a qualified contribution to a health FSA or HSA can help you in taking a deduction for the amount of your contribution. These contributions can reduce your taxable income on Form W-2. As a result, your income tax bill reduces.

However, if your employer is making qualified contributions for you, these amounts may not be taxable. At the same time, health account contributions may not reduce your income tax subject to Social Security and Medicare tax.

Accessing the money in your FSA/HSA account

You can typically use a debit card tied to your FSA account or pay out of pocket and then submit receipts to the FSA administrator to get the reimbursement. 

For HSA, you can use your debit card linked to the account. Your HSA manager will likely issue Form 1099-SA to show distributions used from the HSA account. It is important for a taxpayer to keep receipts and documentation of the money spent on medical bills in case of any questions from the IRS.

This page is purely informational. Line does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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