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I'm walking through my open enrollment documents and there's this part that surprises me...

Is the annual amount of the contribution available on the first day of coverage?

HSA: No. Only the amount currently available in the HSA may be used to pay or reimburse qualified expenses.

FSA: Yes.

I had phoned my dentist this morning to get an estimate for some treatment I wanted to begin to sock away money for so I could make the payment at the end of the year and get my FSA contributions lined up today. I was under the impression that I had to wait for the payroll contributions to accrue to get to the balance needed to cover the treatment expense. This would match my experience with HSA's where it's my own private account and I can only debit from it what the current balance is much like a regular checking account.

However, this FSA account seems like an entirely different animal. It seems to me like an FSA is an account that can hold a negative balance in the account that I'm expecting cannot exceed my yearly contributions. How is all this managed and regulated exactly? I see biweekly withdrawals out of payroll, where does the money come from if I spend the total yearly amount in the first month of coverage using the assigned Health Care Spending Card.

  • Note that a dependent care FSA will only pay out what's already there although you can usually submit claims (costs have already occurred) and they'll pay as the money shows up. – mkennedy Nov 10 '18 at 0:51
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FSA IS an entirely different animal from HSA. FSA is a "spending arrangement" not a "savings account."

With FSA, you elect to forego some amount of income for the year. As of January 1 you have access to spend up to that amount of your employer's money for qualified expenses. If you leave the company having spent all of your allotted funds without contributing an equal amount, there is no repercussions to you, no collection efforts, etc. If, however, you don't spend your allotted amount by the end of the plan year it's forfeited but many plans take advantage of either extending the claim submission deadline or a rollover of a portion of your unspent funds.

An HSA is a savings account with specific criteria that must be met in order exempt those funds from income taxation. Just like your other savings accounts you can only spend money contained in the account. Your employer can contribute in to your account, but also just like your other savings accounts your employer can't see your balance etc; because it's a savings account that's in your name.

  • Somewhere, you might add that unspent FSA dollars are forfeited. With many employees, odds are more forfeit than manage to leave mid-year after spending a year's worth of FSA money. – JoeTaxpayer Nov 9 '18 at 22:07
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    That's certainly the big concern everyone has related to FSAs but I think it's overblown given the plans I've seen. From what I've seen, FSAs are used primarily by high claim folks, chronic illnesses, high prescription drug use, young children, etc. People who definitely hit deductibles. It's pretty rare for significant amounts of money to remain unused FSAs. In fact, most of the employers I've seen chose the extended grace period rather than a fund rollover because the problem people have is timely submission of claims, not a lack of claims to consume their election. – quid Nov 9 '18 at 23:12
  • I couldn't say, either way. Now that you mention it, I'd love to see real stats on this. – JoeTaxpayer Nov 10 '18 at 0:47
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FSAs and HSAs are different. An FSA is more like insurance while an HSA is more like a savings account.

Relevant difference here being:

  • You can't withdraw more from an HSA than you've deposited. But if you have money left over at the end of the year, it's still yours, it carries over to the next year and the next indefinitely.

  • You can withdraw more from an FSA than you've deposited. But if you withdraw less and you have money left over at the end of the year, it's lost. (There are some rules for carrying money over for 2 months into the next year, or carrying over up to $500.) (Exact numbers may have changed.)

So your employer or the insurance company or whoever is managing an FSA is taking a risk. Some employees will withdraw money from the FSA before they deposit it, and the company will have to come up with the cash. Some employees will withdraw more than they've deposited, and then quit their job and never pay it back, and the company will take a loss. But other employees will deposit money, never withdraw it, and then they forfeit it at the end of the year.

It's like insurance. If you buy a life insurance policy and you live a long time, you might pay more in premiums than the insurance company pays out when you die, and the insurance company is happy. If you buy a life insurance policy and then shortly after that you die in a tragic accident, then your family may collect more in benefits than you paid in premiums, and you win!

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