Everything You Need to Know About Health Savings and Flexible Spending Accounts

Along with acronyms for preferred provider organizations (PPOs) and health maintenance organizations (HMOs), add two more to your list. Both can help you pay doctor's bills and save money.

Health savings accounts (HSAs) and flexible spending accounts (FSAs) help pay medical expenses and offer tax-savings benefits. They both can help you make the most of your health care dollars.

When you go to the doctor, you may have to cover a copay or pay the full amount of the visit upfront (depending on your health insurance plan). Either way, most people pay this amount out of pocket. If your copay is $30, the cost may not be a big deal. But if your health plan requires you meet a deductible before it starts paying, the upfront, out-of-pocket cost could be pretty steep. It could even be several hundred dollars or more if you see a specialist.

Wouldn’t it be nice to have a savings account to cover these out-of-pocket costs? What if the savings account was funded with pre-tax dollars? An account like that could be pretty helpful.  

HSAs and FSAs do exactly that. They set aside some of your income before you pay taxes. When you use these accounts, you can save hundreds of dollars throughout the year. At the end of the year, you also have a lower reported income.

There are some rules to make sure these accounts are used properly. Answers to these questions will help you understand more.

How Does an HSA Work?

Because it is a health savings account, an HSA can only be used to pay for qualified medical expenses — even those not covered by health insurance. Qualified medical expenses are defined by the Internal Revenue Service. They include many standard medical, dental, vision and prescription expenses. You can also use your HSA to pay expenses related to a high deductible health plan (HDHP).

You must be enrolled in an HSA-qualified HDHP to contribute to an HSA. Even if you are no longer enrolled in a qualified HDHP, you can still use the funds to pay for qualified medical expenses.

With an HSA, you set aside pre-tax money to fund the account. When you visit a doctor or go to a hospital in your network, you can pay the full cost of service from your HSA account until you reach your deductible. Once you meet your deductible, your HDHP kicks in and you can use your HSA to pay lower up-front costs. Always check to see which doctors are in your network. Use the Blue Cross and Blue Shield of Montana Provider Finder^® before scheduling a visit to keep your costs down. You can still choose to see a doctor out of your network, but will pay a higher price.  

What Do I Get?

When you deposit money into your HSA account, you get tax savings. Some employers even contribute funds to your HSA. If you don’t use all the money in your account by the end of the year, you can roll it over. Your HSA money grows from year-to-year and never expires. Plus, you get to keep all the interest. You can even take your money with you if you retire, change jobs or move to another city.

What Isn’t Covered?

While your money rolls over year to year, it could run out if you have a major medical expense and don’t have enough money in your HSA to cover it. Also, an HSA isn’t an emergency piggy bank. There are penalties if you use it to cover non-qualified medical expenses.

How Does an FSA Work?

Similar to an HSA, a flexible spending account is also a savings account. An FSA is funded with pre-tax dollars you can use to pay qualified medical expenses. You can add funds to your FSA throughout the plan year without paying tax on that money. The account can help cover copays, coinsurance, medical tests, vision, dental and prescription expenses. You can have an FSA with any health plan, including a PPO or HMO. If you want to have both an HSA and FSA, the FSA may only be used for limited purposes.

What Do I Get?

An FSA offers tax savings! Some employers contribute funds to your FSA, and you may be able to roll over money to the next year, depending on IRS rules. 

What Are the Drawbacks?

If you have extra money in your FSA account at the end of the year, you may lose it. Rollover limits can change, and employers decide if they will allow it or cap it at a lower amount. Your employer owns the account, and you can’t take the funds with you if you change jobs or retire.

How Are an HSA and FSA Alike?

Both are pre-tax savings accounts used to pay for your doctor, hospital visits, prescriptions and other medical expenses. You can contribute to them all year long, and your employer may contribute as well. You don’t have to open an HSA or FSA. They are just two options to help you save money and make the most of your health care dollars.

Remember, you save when you use doctors who are in-network. Once you meet your out-of-pocket maximum, your health plan pays covered services at 100 percent. Depending on your needs, you can save a lot of money by having one of these savings accounts.

Should I Choose an FSA or HSA?

Your choice depends on the level of coverage that’s right for you. If you are not managing ongoing medical treatment and want to invest the money you save for future medical expenses, an HDHP/HSA combination may be right for you. If you are managing a chronic health condition and ongoing medical expenses, a PPO and FSA might be a good choice. Our customer advocates and your human resources department can help you decide.

Originally published 6/15/2016; Revised 2021, 2022, 2024