fsa-substantiation

Lauren Hargrave - Headshot

how-does-fsa-work

hsa-fsa-travel-expenses

leslie headshot

Craig Solomon circle

how-to-establish-an-hsa

using-benefits-wisely

fsa-rollover-versus-grace-period

ben-luthi

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FSA Eligible Items

HRA (Health Reimbursement Account)

Learn how to use your HSA or FSA funds to pay for eligible travel and transportation expenses. 

How to Use Your HSA or FSA for Travel Expenses

HSA Account Rules

Lauren Hargrave is a writer from San Francisco who focuses on technology, finance and wellness. She follows comedians like most people follow bands and believes an outdoor sweat session can cure almost any bad mood. She’s also been writing her first novel for so long, her mom doesn’t ask about it anymore.

Lauren Hargrave

How does an FSA work and should you get one? Here’s everything you need to know to decide if an FSA is right for you.

How Does a Flexible Spending Account (FSA) Work?

Craig Solomon is a Lifecycle Marketing Manager at Lively with more than 10 years of experience in the HSA industry. When he’s not helping Lively better understand their customers, you can find him listening to music or taking long walks in nature with his family. 

Craig Solomon

have or was offered job-based insurance?

FSA (Flexible Spending Account)

When you substantiate your FSA, this means you’re verifying that your purchase is FSA eligible according to the IRS.

When Do I Need to Substantiate My FSA?

Let’s take a look at Health Reimbursement Accounts (HRAs) and Health Savings Accounts (HSAs) and see how each can help you save for healthcare.

HSA vs HRA Plan: Which is Better for Individuals and Families?

Everyone wants to make the most of their HSA funds. That’s why knowing how to establish an HSA is so important. 

How to Establish an HSA

FSAs are generally “use it or lose it.” But if your employer offers an FSA rollover or grace period, you have options.

FSA Rollover vs. Grace Period: Which Is Better?

Flexible Spending Account Rules

Benefits

Healthcare Benefits

Ben is a Freelance Content Specialist who specializes in personal finance and travel. Ben’s work can be seen in publications such as NerdWallet, Experian, Wirecutter, Credit Karma, and Bank Rate. When he’s not writing, you can find him trying new foods, hiking, and spending time with his kids.

Ben Luthi

HSA (Health Savings Account)

Leslie is a Freelance Content Specialist who focuses primarily on the backend of start-up life. With experience in things ranging from healthcare to payroll, Leslie has brought her experience to many start-ups, including Brex, Gusto, Homebase, and Wonolo. When she's not writing, you can find her reading our out on a hike. 

Leslie Harding

__Editor's Note:__ This blog post was originally published on October 4, 2018. We have edited content with more up-to-date information. 

---

The notion that healthcare costs are on the rise is ubiquitous. What’s not as obvious is what you as a consumer can do about it. It can see like the options are limited. That’s when opening either a Health Reimbursement Arrangement (HRA) or a Health Savings Account (HSA) can help you.

Both of these accounts can be used to pay for qualified medical expenses. But which account is better for you as an individual, or for your family? It’s going to depend on your specific needs. Let’s start with the basics.

## What is an HRA?

A [health reimbursement arrangement](https://livelyme.com/what-is-an-hra/) (HRA) is an employer-funded account from which employees can reimburse their out-of-pocket medical expenses. It can give you flexibility in terms of health insurance since it’s not tied to a particular plan.  Sometimes you can even use your HRA to pay for your health insurance premiums, depending on which type of HRA your employer offers.

Your employer can choose to allow your HRA contributions to rollover to the following year. Or allow you access to your balance once you retire or leave the company for another reason.

There are four different types of HRAs: 

1. __Group HRA__: This type of HRA is offered as part of an employer-sponsored group health plan. Your employer funds the account and from it you can reimburse yourself for qualified medical expenses.
2. __Individual Coverage HRA (ICHRA)__: Employees may use deposits to pay for health insurance premiums as well as qualified medical expenses. This enables employees to purchase their own health plans in the private market.
3. __Excepted Benefit HRA (EBHRA)__: You can use deposits for out-of-pocket expenses related to dental, vision, short-term disability, etc. 
4. __Qualified Small Employer HRA (QSEHRA)__: If your employer has fewer than 50 employees, they might offer this type of HRA. It helps employees buy health insurance plans in the private market and pay for other employer-approved expenses.

### The Benefits of an HRA

- You don’t need to buy a specific health insurance plan so you’re free to choose the one that works for you and your family. 
- Employers can make unlimited contributions to: Group HRAs, ICHRAs, and EBHRAs. Qualified Small Employer HRAs, do have contribution limits: $5,050 for individuals and $10,250 for families. 
- Can be paired with a [Flexible Spending Account](https://livelyme.com/how-does-an-fsa-work) (FSA).

## What is an HSA?

A [health savings account](https://livelyme.com/what-is-hsa) (HSA), is a savings account into which you, your employer or anyone else can deposit money tax-free. You can use this money to pay for qualified medical expenses directly by using the provided debit card. You can also reimburse yourself for expenses you paid for using your personal checking or savings accounts or credit card.

To qualify to open and contribute to an HSA you must also enroll in a [High Deductible Health Plan](https://livelyme.com/what-is-a-high-deductible-health-plan-hdhp/) (HDHP). If your employer doesn’t offer an HSA or an HDHP, you can buy both in the private marketplace.

In 2021 the annual contribution limits for HSAs are: $3,600 for individuals and $7,200 for families. Any unused contributions roll over to the following plan year and never expire. Meaning you can even take your savings into retirement. 

### The Benefits of an HSA

- __Multiple sources of contributions__. You, your employer, relatives or anyone else can contribute to your HSA.
- __Tax-free contributions__. You won’t pay federal income taxes, (most) state income taxes, or payroll taxes (FICA) on deposits taken directly from your paycheck. If your employer makes contributions, that money is not included in your gross income.
- __Tax-deductible contributions__. Any contribution made with after-tax dollars can be deducted from your gross income.
- __Tax-free distributions__.  If you use your HSA funds for a qualified medical expense, you will not have to pay taxes - ever. 
- __Your contributions never expire (even those made by your employer)__. This allows you to use your HSA as a retirement account. 
- __You can invest your contributions__. Plus, your funds can gain interest tax-free.
- __Make changes anytime__. You can start an HSA, change the amount you’re contributing or stop contributions altogether at any time during the year. You don’t have to wait for open enrollment.

## HRA vs. HSA: Which is Better for Me or My Family?

To decide between an HRA and an HSA, look at your specific circumstances. Each account has different pros and cons, and every family has a different situation. Here are a few things to consider for each type of account:

### When You Should Choose an HRA

1. __You really want to keep your doctor__. If using your employer’s health insurance plan won’t allow you to do that, you could choose an HRA over their health insurance plan. Whether it's a specialist or a pediatrician you love, sometimes keeping your doctor is important. If your employer offers an ICHRA or a QSEHRA, you could use it to buy a health insurance plan that allows you to keep your doctor.
2. __Your employer’s health insurance plan is inadequate for your needs__. If your out-of-pocket expenses are too high, you could use a Group HRA to help pay for them. Or you could use an ICHRA or a QSEHRA to buy a health insurance plan that works better for you.  
3. __Your medical expenses don’t change much from year-to-year__. Consistent expenses make it easy to plan how you'll use your HRA money.
4. __A HDHP won’t work for you or your family__. One drawback to high deductible health plans is the high deductible. If you’re not sure you can afford it, then an HRA and a more comprehensive health plan might be more suitable for your family.

### When You Should Choose an HSA

1. __You want to lower your monthly health insurance premium__. HDHPs typically have lower monthly premiums than other health plans. You can deposit the money you save on your monthly premium into your HSA tax-free. Then use it to help pay for your deductible or other qualified medical expenses.
2. __You rarely go to the doctor__. If you rarely use the medical system outside of preventative care (vaccines count as preventative care), then an HDHP/HSA combo might work for you.
3. __You can afford to put your own money into a health savings account__. Contributing your own money could allow you to save up for larger medical expenses down the road. Remember, HSA contributions never expire!
4. __You want to use your account to save for retirement__. Once you turn 65, your HSA works like a traditional retirement account. You can still use distributions tax-free for medical expenses, but you can also use them for things like groceries. It’s important to note that you will pay income tax on any disbursements you use for non-medical related expenses.
5. __You want to invest your deposits__. Investing is a great way to make passive income and to grow your HSA balance.
6. __You want flexibility on the timing of your deposits__. Maybe you get a year-end bonus and you want to deposit a portion of that into your HSA. Maybe you have major medical expenses for which you want a tax-free way to save. HSAs allow you to change the amount you contribute at any time, so you can deposit money when you have it (or need it), and forgo deposits when you don’t.

To decide between an HRA and an HSA, you’ll have to answer the following questions for your unique situation: 

- Why do I want to use one? 
- What will put me and/or my family in the best health and financial situation?
- Do the rewards of either account outweigh the potential risks or vice versa?

Both HRAs and HSAs can provide enormous benefits to the consumer. If you have questions about your specific employer-sponsored account, health plan or how these plans might affect your situation, reach out to your Human Resources department.


A [Flexible Spending Account](https://livelyme.com/how-does-an-fsa-work) (FSA) offers employees the chance to save for medical expenses pre-tax. The arrangement can save you hundreds or even thousands of dollars per year. Be warned, you must use your FSA funds by the end of each plan year.

That is, unless your plan has an [FSA rollover](https://livelyme.com/flexible-spending-account-fsa-rollover) or grace period. The Internal Revenue Service (IRS) allows employers to opt-in to one of these options. Both options can help their workers who have an end-of-year balance. 

It's important to understand what happens to your funds at the end of the plan year. You don't want to leave money on the table!

## The Different Types of Flexible Spending Accounts

There are three different types of FSA plans you can get. These plans are only available through employers that offer them. In each case, your contributions occur on a tax-free basis. This means you’ll save tax money when you file your return.

Here's a look at each different type of FSA:

- __Healthcare FSA__: You can use funds for eligible medical expenses, including dental and vision. Eligible people include you, your spouse and any dependents you claim on your tax return. A [healthcare FSA](https://livelyme.com/what-is-a-healthcare-fsa) can offer a rollover or a grace period.
- __Dependent Care FSA__: Participants can use money from this account to pay for dependent care of a child or adult. It's intended for individuals who need dependent care so they can work. [Dependent Care FSAs](https://livelyme.com/what-is-a-dependent-care-fsa) don’t offer a rollover option, but may offer a grace period or run-out period.
- __Limited-Purpose FSA__: This FSA only includes qualifying dental and vision expenses. [Limited-purpose FSAs](https://livelyme.com/what-is-a-limited-purpose-fsa) can come with a rollover or a grace period.

The FSA contribution limit for healthcare FSAs and limited-purpose FSAs is $2,750 in 2021. With a Dependent Care FSA, you can set aside up to $5,000 if you’re married filing jointly or $2,500 per account if each spouse has one.

Healthcare and limited purpose FSAs are not like HSAs -  you do not have to have a qualified high-deductible health plan to use them. 

As such, they’re perfect if your health insurance plan doesn’t qualify for an HSA.

## FSA Rollover vs. Grace Period: How Do They Work?

The default setting for FSAs is the Use It or Lose It rule. This means you give up any FSA funds you don’t spend by the end of the plan year. This is in stark contrast to HSAs. With an HSA you don't have to use your contributions within a certain timeframe.

Beginning in the 2014 plan year, the IRS added a couple of options for employers. These options help limit that loss for workers with funds left over in a healthcare FSA or limited-purpose FSA.

Employers that offer these FSAs can choose to offer a rollover, grace period or nothing at all. The only catch is that they can’t offer more than one option. If your employer doesn’t offer either option, it may choose to offer a run-out period instead.

### FSA Rollover

With an FSA rollover, participants can carry over up to $500 of their unused funds to the following plan year. 

Let's take this real life example: 

You have a $600 balance at the end of the year. Next year, can start the year off with $500 plus that year's contribution limit. While you did have more money in your FSA left over, you're only allowed to take $500 over into the next year.

If you have less than $500 remaining in your account, you can roll over the full FSA balance. What’s more, you can still contribute the maximum amount in the following year.

Due to the coronavirus pandemic, employers may choose to allow workers to roll over up to $550 of 2020 funds to the 2021 plan year.

### Grace Period

With the grace period option, employees can get an extra 2.5 months (March 15) to use the previous year’s FSA funds. As long as the service occurs within that grace period, it qualifies. 

There’s no limit on how much you can use during an FSA grace period. This means it can be more beneficial if you have more than $500 in remaining funds. 

NOTE: The IRS has offered some additional benefits to accommodate for the coronavirus pandemic. Employers can choose to extend the grace period for 2019 FSA funds through the end of 2020 if the plan follows the calendar year. If they follow a split-year schedule, they can extend through June 30, 2021.

### Run-Out Period

A run-out period is a period of time during your new plan year in which you can still file claims for expenses made in the previous year. 

Let's say your run-out period lasts until March 31.  You will have until then to file a claim for FSA funds for any eligible expense made by December 31 of the previous year. This can be helpful because there’s often a delay between your service or procedure and when you get your bill.

![rollover-grace-period](//images.ctfassets.net/6j8y907dne6i/6ksTi5yHtYefgNmUHrL26r/6ae927ea49c648b29d9f401f66d0fb1c/rollover-grace-period.jpg)

## Which Is Better: A Rollover or a Grace Period?

As an employee,  you don't get to choose which FSA extension option you get. Your employer gets to choose — and remember, they may choose not to offer either.

Depending on the situation, you may have some influence in the decision-making process for future FSA plan years. So it’s a good idea to understand both options and their benefits and drawbacks. Discuss options with your employer so future employees can receive these benefits.

### FSA Rollover Pros and Cons

The biggest benefit to an FSA rollover is that you’ll have the entire upcoming plan year to use the funds from the previous year. This setup is helpful if you don’t have any medical services or procedures scheduled at the beginning of the following year.

The downside is that you can only roll over up to a maximum of $500. Of you have more than that in unused funds, you’ll still be leaving some money on the table, even if not the full amount.

### FSA Grace Period Pros and Cons

The grace period option doesn’t limit how much of the previous plan year’s unused funds you can use. As long as you incur the expense within the first 2.5 months of the following plan year, you can get reimbursed.

That said, the amount of time you have to use your FSA funds is much shorter than with the rollover alternative. If you aren’t proactive about using it all at the beginning of the year, you may still lose some of it. 

## Other Tips for Using Your FSA Money

Make it a goal to use your entire FSA balance by the deadline. Here are a few options to consider:

- __Know what qualifies__: The IRS provides a list of [eligible medical expenses](https://www.irs.gov/publications/p502) and [qualified dependent care expenses](https://www.irs.gov/pub/irs-pdf/p503.pdf). Read through the list to find out if you’ve incurred expenses that you didn’t know were eligible. Remember that if you have a limited-purpose FSA, your options are limited in comparison to a healthcare FSA. 
- __Visit the FSA Store__: The [FSA Store](https://fsastore.com/&utm_source=Lively&utm_medium=TPA+Public+Proprietary+EL&utm_campaign=TPA+Partner) only offers qualified products for your healthcare FSA. You can shop by category and search for products you could use to improve or maintain your health. You can also shop for FSA-eligible items on [Amazon.com](https://www.amazon.com/FSA-Store/b?ie=UTF8&node=17904040011).

One thing to avoid is prepaying for medical care that will not happen during the plan year or grace period. An expense isn’t considered incurred unless the actual service occurs during the account’s plan year. If you try to use your FSA funds to pay for care in advance, it may not be eligible for reimbursement.

## The Bottom Line

The FSA rollover and grace period offer relief to account holders at the end of the year. If you have an FSA, your employer gets to choose which one to offer, and it may not give you either option.

Speak with your HR representative to find out what your employer offers. Regardless of which option they chose, it’s important to be mindful of your account balance. It’s also important to have a plan to use all the money before the deadline. You’ll be able to maximize the value your FSA offers without the stress of trying to catch up the following year.

If you do have unused FSA money at the end of the year, consider adjusting your contributions. This way, you may be able to avoid having a surplus of funds in the upcoming year.


Substantiation? Eligible expenses? FSA card declined and unsure why? While FSAs are great for helping you save money, there are rules that may be a little confusing. With the right information, you can navigate through these rules easily. Here are a few tips to help you become an FSA expert.

## What is substantiation and why is it required?

The IRS requires that every dollar spent from an FSA be eligible and verified. This verification process is "substantiation". This means that you need to prove that everything paid from your FSA is an eligible expense. 

Think of it like this: the IRS lets you use tax-free funds to pay for medical expenses. In exchange, they want proof that you are using those funds for the expenses they deem eligible.

Did your FSA provider request substantiation for a transaction? It's because the merchant that you purchased from was unable to substantiate the expense on their own. When this happens, your FSA provider will want documentation to ensure that your expense is eligible. 

## Follow the Rule of 5 for Substantiation

When submitting documents and receipts for substantiation, be sure to follow the Rule of Five. If your documents cover these five elements, approving your payments will be simple.

1. Patient or dependent name
2. Provider or merchant name
3. Date of service
4. Type of service or product
5. Expense amount

## What is Auto-substantiation?

When paying with your debit card, certain merchants have systems setup to identify eligible expenses. This helps providers authorize eligible expenses without any additional documentation. This process is "auto-substantiation". 

When an expense is auto-substantiated, you won't need to share any receipts with your FSA provider. Pay as you would with your FSA debit card and you're all set. 

Auto-substantiation is most commonly seen at large, national retailers and pharmacies. Big stores like Target, Costco, Walgreens, CVS, Amazon and the FSA Store are a few examples of retailers who are currently set up to auto-substantiate your FSA purchases.

## Why are some debit card purchases authorized, but I still need to submit a receipt?

The intent for your debit card is that it works at merchants and providers where most of the services and products are FSA-eligible. However, not all products at these stores are FSA-eligible. For example, you could be picking up some over-the-counter medication at a pharmacy, but grab a snack on the way out. Your medication is FSA-eligible - your snack is not. 

When you pay for items at these stores, the transaction goes through with the assumption that you purchased qualified expenses. 

Algorithms review the purchase to determine if it was an eligible expense. Sometimes, there isn't enough information from the merchant to auto-substantiate your purchase. This is when your provider would alert you that they need more information. There are many [different types of merchants](https://livelyme.com/where-purchase-fsa-eligible-items) where you can use your FSA. Depending on the inventory of FSA eligible items, some of these stores will require additional documentation.

## Why is my FSA debit card declining?

If you try to use your FSA debit card to purchase eligible items and it declines, there are a few reasons why this can happen. 

Your FSA debit card only works at certain providers and merchants. If you're worried about using your card at a merchant, you can [look up](https://www.sig-is.org/card-holders/store-locator) to see if there are any qualified merchants in your area. 

It is possible that your card declines when making a qualified purchase. When this happens, you can still pay for that qualified expense out-of-pocket. You can then submit the claim for reimbursement later and still receive the tax-free benefits of an FSA.

Wondering why your card declined? Here are three common reasons this can happen:

1. You have not activated your card or the FSA provider suspended your card. (Expired, fraud prevention, etc.)
2. Your FSA has no funds remaining for this plan year, or it has insufficient funds.
3. You are attempting to purchase a mix of ineligible and eligible items with your card. Split your order and pay for only the FSA-eligible items with your debit card.

## Get familiar with eligible expenses

Lively makes it easy with our convenient "[What's Eligible](https://livelyme.com/whats-eligible/)" tool. You can easily search by the type of FSA type you have and see what's qualified. 

Interested in learning more about FSAs? Read about [common FSA-eligible items](https://livelyme.com/flexible-spending-account-fsa-eligible-items) or [different types of FSAs](https://livelyme.com/what-is-an-fsa) on the [Lively blog](https://livelyme.com/blog). 


So you’ve made the choice, you’re ready for an HSA. Now you have to figure out how to open and establish an HSA so you get the most benefits possible. You already know you have to enroll in a qualified high deductible health plan to open an HSA. But there’s one step you may not be aware of—funding your HSA the same day you open it.

That may sound expensive, but in reality all it takes is one cent to establish your HSA. This ensures you can use it on qualified medical expenses moving forward. It's important to establish your HSA if you expect to have any large medical expenses close to your account opening date.

## HSA Overview

A Health Savings Account (HSA) is a tax-advantaged savings account. That means you can contribute funds tax free, grow funds tax free, and use funds for qualified medical expenses tax free. Those are some pretty big tax advantages for healthcare. 

You are [eligible](https://livelyme.com/hsa-eligibility-requirements) to open an HSA if you are also enrolled in a HSA-qualified [high deductible health plan](https://livelyme.com/what-is-a-high-deductible-health-plan-hdhp) (HDHP). You have to be enrolled in an HSA-eligible high deductible health plan to open and contribute to an HSA. But once you have opened and established an HSA, it’s yours to keep, for life.

If you switch to a non-qualified health insurance plan, you will not be able to contribute. However, you can still use the funds in your HSA to pay for qualified medical expenses.

### HSA Contribution Limits

![hsa-contribution-limits](//images.ctfassets.net/6j8y907dne6i/1QT5c25ZrUOQmG0mUcfCZX/f5e8c5453dac6f8d1ff64d7382fbb038/hsa-contribution-limits.jpg)

The IRS determines HSA contribution limits. Those limits often change year to year. For the 2021 tax year, those contribution limits are:

- $3,600 for an individual
- $7,200 for a family

A [Catch-Up Contribution](https://livelyme.com/what-is-an-hsa-catch-up-contribution) of an additional $1,000 if you (or another member of your family on the plan) is 55 or older

Check out our article [What is an HSA?](https://livelyme.com/what-is-hsa) if you need more of a refresher on the ins and outs of HSA accounts.

## What It Means to Establish an HSA

Before we dive into the idea of establishing an HSA, it’s important to know that HSAs are a type of trust. Because they are a trust, this means that the state laws govern the regulations of an HSA. Each state has a different definition of what it means to establish an HSA. In most states, you must do two things to establish an HSA:

1. Sign up to open an account
2. Deposit at least $0.01 into the account

This may sound obvious, but you also have to be eligible to have an HSA and withdraw funds from it. In summary, you must be enrolled in a qualified HDHP, open an HSA, fund the HSA, and be eligible to withdraw funds for your HSA to be considered established.

### Key Dates to Remember

![key-dates-to-remember](//images.ctfassets.net/6j8y907dne6i/5Ssp2nC0vgrIegCWlOVRx3/f39131a7ad77cda2ebb8f188a640b057/key-dates-to-remember.jpg)

There are some key dates you should pay attention to as you go through the process of establishing an HSA. They are:

- __Health Plan Start Date:__ You are eligible to contribute to an HSA on the first day of the first month that you meet all [eligibility requirements](https://livelyme.com/hsa-eligibility-requirements). Let’s say you enrolled in an HSA-eligible health plan like an HDHP on January 15. You are not eligible to contribute to your HSA until February 1st. You must then ‘establish’ your HSA to start reimbursing eligible expenses.
- __HSA Establish Date:__ The most important thing you can do (once you qualify to open an HSA) is to establish an HSA. “Establishing” means different things and unfortunately varies state by state. In some states, it’s as simple as opening up an account. In other states, it means you have to open the account and fund it with as little as $0.01. This is called “penny funding” and meets all federal government requirements for establishing an HSA. If you have any questions regarding this in your state, we recommend finding local tax advisors to help you.
- __Reimbursement Date:__ This date is important so you know exactly when you can use HSA funds for expenses. Any costs (based on purchase date), post-HSA established date are considered eligible expenses. Establishing an HSA adds more flexibility to your healthcare payment options. Find out using our ["What's Eligible?"](https://livelyme.com/whats-eligible) tool.

Not sure what requirements you have to meet? Check out our [eligibility guide](https://livelyme.com/hsa-eligibility-requirements).

In an ideal world, all three of these dates may be the same. If they're different, it's important to keep track of things so you know what expenses are eligible and what isn't.

## The Importance of Establishing an HSA

![establishing-an-hsa](//images.ctfassets.net/6j8y907dne6i/3VV3HLGhfjWtLcKUsgOgAk/d84dc4e3ce7d49d2c47a9d8084e99f75/establishing-an-hsa.jpg)

The reason why it's so important to establish your HSA is that you can use HSA funds for expenses incurred before your account had money in it. You can back-date your expense and [reimburse yourself later](https://livelyme.com/hsa-reimbursement-rules) when you do have funds in your account.

The most common way people contribute to an HSA is with pre-tax payroll deductions through an employer-sponsored plan. If you cannot contribute through payroll deductions, you’ll contribute after tax. These contributions are eligible for a tax deduction through your annual income tax. 

After that, funds grow in your HSA tax free. You can also create an [investment account](https://livelyme.com/how-does-a-health-savings-account-work) for those funds. You can distribute funds tax free to spend on qualified medical expenses at any time. If you’re over age 65, you can use the funds on anything, but you will have to pay regular income tax, just like a 401(k). Establishing an HSA adds a lot more flexibility for retirement and specifically for healthcare costs.

## Open Now So You Can Save Tomorrow

There is a lot to take into consideration when you open an HSA. Knowing the difference between opening and establishing your HSA is one of them. Your HSA can be a great way to save money for healthcare expenses now and save money for retirement long term. As long as you pay attention to the details and establish your HSA correctly, you’ll have a valuable savings tool for years to come.


Let’s face it, medical bills can get expensive fast, even if you don’t have chronic health issues. An FSA or [Flexible Spending Account](https://livelyme.com/what-is-an-fsa/) gives you the chance to set aside money before taxes. You can save these funds or use them to pay for qualified medical expenses. The [benefits of an FSA](https://livelyme.com/is-fsa-worth-it-flexible-spending-account) include tax savings, front-loaded accessibility, and convenience. 

But not everyone qualifies for an FSA, and some aspects of the plans may be less than appealing for some. If you have consistent health care costs, here are some ways an FSA may be able to help.

## What is a Flexible Spending Account (FSA)?

An FSA is a pre-tax health account, and it's sometimes referred to as a Medical FSA or [Healthcare FSA](https://livelyme.com/differences-between-hsa-vs-healthcare-fsa-infographic). You can use the funds in this account to pay for eligible medical expenses.

You can only get a Flexible Spending Account through an employer. The [Society for Human Resource Management](https://shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/2018%20Employee%20Benefits%20Report.pdf) states 63% of companies offered FSAs in 2018. If your employer offers an FSA and you’re eligible to contribute, you can use it to save money on a pre-tax basis. 

Then you can use that money to pay for qualified medical expenses throughout the year. The tax savings will depend on how much you contribute and your [effective tax rate](https://www.thebalance.com/how-to-calculate-your-effective-tax-rate-4685263). Who wouldn’t want to keep even a little extra money in their pocket, rather than giving it to Uncle Sam?

![fsa-101](//images.ctfassets.net/6j8y907dne6i/245iacvnky7WkzoWlUna9q/1ee372d996bf26ecae21fb9fc04243ce/fsa-101.jpg)

Unlike similar health accounts, FSAs are front-loaded, which means you decide how much to contribute from each paycheck during the upcoming plan year. Once the plan year begins, you’ll receive the total of all your expected contributions from the get-go.

Here’s an example of how this works:

Let’s say you decide to set aside $100 per paycheck, and you’re paid two times a month. That’s a total of $2,400 over the course of a year. But you’ll receive that full amount at the beginning of your plan year.

That said, FSAs also have a “Use it or Lose it” policy, and it’s about as fun as it sounds. The rule says you must use all the money in your FSA within the same plan year that you make the contributions. Otherwise, you may have to give up the remaining amount. That said, employers may choose one of two options to provide some leniency with the rule.

First, they can give employees a grace period of up to two-and-a-half months. During this time, employees can incur new expenses and use the previous year’s funds to cover them. The second option allows participants to carry over up to $550 in 2020 FSA funds to the next plan year. 

Because of the “Use it or Lose it” rule, an FSA may not be the best fit for someone who doesn’t incur medical expenses often. You must choose how much you want to contribute to the account during open enrollment. As a result, it's essential to have a good idea of your upcoming expenses, so you don't overfund the account.

Finally, FSAs are not portable, so if you leave your employer, you can’t take your FSA funds with you. But, if you leave your job and used more FSA funds than you contributed for the year, you don’t have to repay the difference. 

## How to Add Money to Your Flexible Spending Account (FSA)

![how-to-add-money-fsa](//images.ctfassets.net/6j8y907dne6i/ghvKX5NnCHG3CKEukkbuA/abdf5693d3598f288cf421b0cdcabe30/how-to-add-money-fsa.jpg)

After you’ve determined your contribution amounts, you’ll put money into the account through paycheck deductions. The IRS sets contribution limits each year — in 2020, you can contribute up to $2,750. 

Unfortunately, there’s no higher limit if you’re on a family plan. But if you have a spouse or partner, both of you can save up to the annual limit of an individual FSA.

Remember, you’ll decide how much you want to contribute with each paycheck at the beginning of the plan year. So you’ll want to plan ahead. Also, if you carry over FSA funds from the previous plan year, that won’t count toward your contribution max.

You may be able to make changes during the year if certain events occur. Some qualifying life events include marriage, divorce, or having a baby. If any of those things happens, you’ll have 30 days to update your contribution amount.

Your employer may also choose to contribute to your FSA. They can do a dollar-for-dollar match, or $500 max. The limit is whichever option is greater. If you plan to set aside less than $500, the most your employer can contribute is $500. But if you contribute more than that, you can get a match of up to $2,750. 

## How to Use Your Flexible Spending Account (FSA)

![how-to-use-fsa](//images.ctfassets.net/6j8y907dne6i/2QPg18oIwVGQmqXy9acLq7/c6554398b6655532f2b4a8cea2301113/how-to-use-fsa.jpg)

You’ll typically have two options for using your FSA funds to pay for eligible expenses:

- __Debit card__: Most FSA providers give you a debit card tied to the account. When you need to pay for a qualified medical expense, use the card as you would any other debit card.
- __Reimbursement__: If you choose to pay for your health care costs out of pocket with debit or credit cards, you can request for reimbursement. Make sure you keep your receipt. You’ll need to upload it through your online account or mobile app to receive the money.

You can’t use your FSA funds for everything, even if it is health-related. For example, if your health insurance already covers the cost, you can’t double-dip. Cosmetic surgery is also a no-no. Most in-person doctor visits, prescriptions, dental, and vision care are qualified expenses. 

Check the [IRS website](https://www.irs.gov/pub/irs-pdf/p969.pdf) or [What’s Eligible](https://livelyme.com/whats-eligible/) for a full list.

## How Does an FSA Compare with Other Health Accounts?

Your employer may offer more than one option for tax-advantaged health savings. They can offer a [Health Savings Account (HSA)](https://livelyme.com/what-is-hsa) or a [Health Reimbursement Arrangement (HRA)](https://livelyme.com/what-is-an-hra/). 

If your employer offers more than one type of health savings plan, find out which ones you’re eligible for. Then read all the terms to compare your options to decide which is the best for you. Here’s a quick summary of each:

### Health Savings Account (HSA)

An [HSA](https://livelyme.com/hsas-vs-fsas) allows you to set aside pre-tax dollars for eligible health care costs. HSAs are only available for people enrolled in a [High Deductible Health Plans](https://livelyme.com/what-is-a-high-deductible-health-plan-hdhp/) (HDHPs). Contribution limits for 2020 are $3,550 for a self-only health plan and $7,100 for a family plan. You can add $1,000 more in catch-up contributions if you’re 55 or older. 

There’s no “Use it or Lose it” rule, and HSA plans are portable. If your employer does offer an HSA, it may choose to make contributions on top of yours. Finally, unlike an FSA or HRA, you can invest your HSA funds.

### Health Reimbursement Arrangement (HRA)

![health-reimbursement-arrangement](//images.ctfassets.net/6j8y907dne6i/4Pk5gER976pNS8GgDtOF9n/5592d92a667a78d163da4633c2422038/health-reimbursement-arrangement.jpg)

You can only [get an HRA](https://livelyme.com/fsa-vs-hra) through an employer, and the company owns the account. Some employers may even choose to offer an HRA instead of health insurance plans. The primary difference between the two is that only an employer can make contributions to an HRA. 

Contribution limits will vary based on the type of HRA you have. Any money your employer contributes is not considered income on your tax return. Your employer will get to decide which expenses are eligible. They also determine whether you can carry over unused funds at the end of the year.

__NOTE:__ A healthcare FSA is different from a Dependent Care FSA. A [Dependent Care FSA](https://livelyme.com/what-is-a-dependent-care-fsa) allows you to pay for qualified care expenses that will enable you to work. You can also get tax benefits from a Dependent Care FSA, but many of the rules differ from a health FSA.

## The Last and Most Important FSA Tip

FSAs are best to use for expected qualified health expenses. Do your best to plan each year and review your expected expenses to maximize the tax savings. The last thing you want to do is lose money at the end of the year. But with the right strategy, FSAs are a great tool to save money on annual health savings.

Are you making the most of your FSA or HSA? If you have a Health Savings Account ([HSA](https://livelyme.com/what-is-hsa)) or Healthcare Flexible Spending Account ([FSA](https://livelyme.com/what-is-a-healthcare-fsa)), you know you can use them for common medical expenses. This includes copays, medical equipment, and prescription costs. You also know you can't use these account to pay for premiums or for non-healthcare expenses. But did you know that you can also use them for some healthcare-related travel expenses? 

It’s true! You can use your HSA or FSA funds to pay for eligible medical-related travel expenses. This is a unique feature of HSAs and FSAs. You cannot use a [Dependent Care FSA](https://livelyme.com/what-is-a-dependent-care-fsa) or a [Limited Purpose FSA](https://livelyme.com/what-is-a-limited-purpose-fsa) to pay for healthcare-related travel.

## FSA and HSA Eligible Travel Expenses

![fsa-hsa-travel-expenses](//images.ctfassets.net/6j8y907dne6i/4kws3Kx468LN6W9NQdEILC/c430b77c5db1c87a3070d9e860b62278/fsa-hsa-travel-expenses.jpg)

There are three things to ask yourself when thinking about healthcare travel expenses:

1. Is this treatment "necessary"?
2. Is this treatment "reasonable"?
3. Is this treatment "eligible"?

The definition for "necessary" is pretty self-explanatory. That means your travel is for a needed medical treatment. This treatment is a must-have, not a nice-to-have. 

"Reasonable" means you aren’t taking a private plane to the best hospital in the country. It’s more like you’re taking a Lyft to Urgent Care or driving an hour to a specialist one city over. 

"Eligible" means the IRS determines it is an eligible and qualified expense. You can check [IRS Publication 502](https://www.irs.gov/publications/p502) for more information on what is eligible. 

There are a few different types of travel-related expenses that may be eligible under your HSA or FSA. Remember, all transportation expenses are relevant to you receiving health care. The primary purpose for eligible travel must be for receiving medical care. You can use your FSA or HSA to pay for qualified travel costs associated with a dependent's care.

![use-hsa-travel-expenses](//images.ctfassets.net/6j8y907dne6i/3PK8okTZ6HsSr6kwrRrm3c/8dbaaddd9b18ce300d9353073135fca0/use-hsa-travel-expenses.jpg)

Some common eligible travel expenses include:

- Rideshare apps, public transportation, taxis, trains, ferries, and rental cars
- Tolls, if a toll route is the only way to get to the facility
- Parking fees
- Fuel costs from driving your personal vehicle

Here are some travel expenses that are NOT eligible:

- Vehicle maintenance, repair, or depreciation
- Personal expenses, like meals on the road
- Auto insurance
- Tickets or other penalty fees charged 
- Anything not related to getting medical care. You cannot get reimbursed for a vacation where you happen to go to the doctor. Your travel must be for, and essential to, medical care.

## How to Receive a FSA Travel Reimbursement

![hsa-travel-expenses](//images.ctfassets.net/6j8y907dne6i/4zGiiSgPMvIVAe7UOdIhsl/116236f44086984dfef73e85a23eab2f/hsa-travel-expenses.jpg)

You can’t use your FSA debit card to pay for travel like you can for other eligible expenses. You must pay out of pocket and save your receipts to submit for reimbursement. It’s a good idea to use a debit or credit card so you have a detailed record of that transaction. Make sure your receipts show the provider, date, and amount you paid -- and don’t lose any! If you don’t have the proper documentation, you likely will not receive reimbursement. 

To receive reimbursement for fuel costs, keep a mileage log with receipts for gas. You can either work out your exact fuel costs for miles driven or you can use the IRS’ [standard mileage deduction](https://www.irs.gov/newsroom/irs-issues-standard-mileage-rates-for-2020). 

As of January 1, 2020, mileage for travel to and from eligible healthcare services receive reimbursement at $0.17 per mile. Google Maps or other map services on your phone can be a great way to document and calculate your miles.

## How to Use Your Hsa for Travel Expenses

![fsa-travel-reimbursement](//images.ctfassets.net/6j8y907dne6i/799zy5ij03zWuSJJPi8HgW/fd34e2893870e421d4eb1e9915c02d8d/fsa-travel-reimbursement.jpg)

If you have an HSA rather than an FSA, you can still use it for the eligible travel expenses discussed above. The process for using the funds may look a little different.

With FSAs, you can only use your plan debit card in limited places. So you have to gather receipts and submit them for reimbursement. With HSAs, you own the account, not your health plan. Because of this, you can use the associated debit card at more places. It is possible that you’ll be able to pay for eligible travel expenses with your debit card.

If you can't use your HSA debit card, pay for the expense out-of-pocket. Save your receipts so you can reimburse yourself through your HSA later. Make sure you keep your receipts handy. In the event you're ever audited by the IRS, you will need proof that your expenses are eligible.

## Other FSA and HSA Eligible Expenses You May Not Know About 

Here are some other less common expenses that you may not be aware are healthcare FSA or HSA eligible:

- __Guide dogs__: This includes the costs of buying, training, and maintaining a guide dog.
- __Braille books and magazines__: You can use your HSA or FSA to pay for the difference in cost between the regular version and the braille version.
- __Drug addiction treatment and counseling__: This includes detoxification, counseling, and self-help groups. 
- __Certain at-home test kits__: This includes fertility tests, hearing tests, and more. 
- __Nursing home__: Many types of skilled nursing facilities are eligible.

![uncommon-hsa-expenses](//images.ctfassets.net/6j8y907dne6i/5j6CMTxM479C8q86zNY1kT/78b2c5acdc5c29910445c4e9fecbc170/uncommon-hsa-expenses.jpg)

And a few that are NOT eligible: 

- __Diapers and diaper services__: This service isn't eligible for reimbursement unless used to treat a specific medical condition caused by a mental or physical disability.
- __Weight loss programs__: You must have a Letter of Medical Necessity (LMN) for this to be eligible.
- __Special food__: You must have a Letter of Medical Necessity (LMN) for this to be eligible.
- __Health club dues__: This expense is not eligible for reimbursement unless used to treat a specific medical condition. 

## Make the Most of Your FSA and HSA

Using your FSA or HSA to pay for eligible travel-related expenses is a good way to get the most out of your account. Since you are using pre-tax funds, you are lowering your out-of-pocket costs.

Ensure you are getting the most out of your tax advantaged accounts. If you travel for medical reasons and don’t use your FSA or HSA to pay for expenses, you could be missing out on major savings.