Unlocking the Benefits of HFSA: How to Save on Healthcare Costs

What is an HFSA?

A Health Flexible Spending Account (HFSA) is a tax-advantaged account that allows you to save money by setting aside pre-tax dollars from your paycheck for healthcare-related expenses. This means you don’t pay federal taxes on the money you contribute to your HFSA, helping you save on medical costs and lowering your taxable income.

Key Features of an HFSA

1. Tax Savings: The money contributed to your HFSA is not subject to federal income tax, Social Security, or Medicare taxes, reducing your taxable income.
2. Eligible Expenses: HFSA funds can be used for qualified healthcare expenses such as copays, prescriptions, medical devices, and even over-the-counter medications (with a prescription).
3. Contribution Limits: The IRS caps annual HFSA contributions. For 2024, the limit is typically around $3,050, though your organization may set a lower limit.
4. Use-It-Or-Lose-It: Generally, if you don’t use the funds by the end of the plan year, you lose them. Some plans offer a grace period or allow you to roll over a limited amount of unused funds (up to $610 for 2024).
5. Funds Availability: The total amount you elect to contribute is available for use from the start of the plan year, even if you haven’t fully contributed that amount yet.

How an HFSA Works

• Enrollment: During your organization’s open enrollment period, you decide how much to contribute to your HFSA for the upcoming year, up to the IRS limit.
• Payroll Deductions: The amount you choose is taken out of your paycheck in equal amounts over the course of the year.
• Using the Funds: You can pay for eligible healthcare expenses using your HFSA debit card or by submitting receipts for reimbursement.

Practical Ways to Use Your HFSA

How to Use Your HFSA in Stores

1. Using the HFSA Debit Card:

   • Your HFSA plan typically provides a debit card that’s linked directly to your account.
   • At the store, simply swipe or insert the card at checkout for eligible healthcare items (prescriptions, medical supplies, over-the-counter medication, etc.).
   • Many pharmacies and major retailers, such as Walgreens, CVS, and Walmart, automatically recognize which items are HFSA-eligible and process the payment accordingly.

2. Keep Receipts: While most transactions are automatic, your HFSA provider may sometimes require proof that a purchase was eligible. Keep your receipts in case you need to submit them later.

3. Eligible Purchases in Stores:

   • Prescription medications
   • Eyeglasses or contact lenses
   • Doctor visit copays
   • First aid items like bandages, thermometers, and more

How to Use Your HFSA Online

1. Online Retailers: Many retailers, including Amazon, Walgreens, and CVS, accept HFSA cards for eligible items.

   • Amazon Example: Amazon has a feature that allows you to filter HFSA-eligible products. Simply search for “FSA/HSA Eligible” and add items to your cart. At checkout, use your HFSA card as payment.

2. HFSA Debit Card: When shopping online, use your HFSA debit card just like a regular debit card. It will automatically apply the funds to eligible purchases. If an item isn’t eligible, the transaction may not go through, or you’ll need to use another payment method.

3. Manual Reimbursement Option: If you pay for an eligible healthcare expense without using your HFSA card, you can still be reimbursed:

   • Submit your receipt to your HFSA provider via their website or mobile app.
   • Once approved, the funds will be reimbursed to you, often via direct deposit.

Eligible HFSA Expenses (Common Examples)

• Doctor visits: Copayments, coinsurance, and deductibles.
• Dental expenses: Routine cleanings, fillings, orthodontics.
• Vision care: Eyeglasses, contact lenses, vision correction surgery.
• Prescriptions: Medications prescribed by your doctor.
• Over-the-counter medications: Pain relievers, allergy medications (with a prescription if required).
• Medical supplies: Bandages, crutches, blood pressure monitors.

Pros and Cons of an HFSA

Pros

• Tax Savings: Contributions are pre-tax, reducing your overall taxable income.
• Immediate Availability: The full contribution amount is available to use at the start of the plan year.
• Broad Coverage: Covers a wide range of medical, dental, and vision expenses.

Cons

• Use-It-Or-Lose-It Rule: Unused funds at the end of the plan year may expire unless your plan offers a grace period or rollover option.
• Contribution Limits: There’s a cap on how much you can contribute each year.
• Eligible Expenses Only: HFSA funds can only be used for specific medical-related costs.

Is an HFSA Right for You?

Here’s how to decide if an HFSA fits your needs:

1. Predictable Medical Expenses: If you anticipate recurring medical expenses like prescriptions or regular doctor visits, an HFSA can help save on taxes.

2. Maximizing Tax Benefits: If you’re looking to lower your taxable income and take advantage of tax savings, an HFSA is a great option.

3. Managing the Use-It-Or-Lose-It Rule: If you’re comfortable estimating your healthcare expenses for the year, the risk of losing unused funds can be minimized.

Tips to Maximize Your HFSA

1. Estimate Expenses: Look at last year’s medical costs or expected expenses to help decide how much to contribute. Don’t overestimate, as unused funds may expire.

2. Track Your Balance: Regularly monitor your HFSA balance and make sure you’re using it throughout the year to avoid losing any remaining funds.

3. Take Advantage of Rollovers/Grace Periods: If your plan offers a rollover option or a grace period, ensure you understand the rules and plan accordingly.

4. Use the Full Contribution: If you’re nearing the end of the plan year and still have funds, consider buying eligible items like glasses, contacts, or stocking up on over-the-counter medications to use the remaining balance.

Comparing HFSA vs HSA

• HFSA: Best for covering predictable healthcare costs. Has a use-it-or-lose-it rule, and funds are not rolled over year-to-year unless specified.
• HSA: Allows funds to roll over year after year and may be invested. However, HSAs are only available if you have a high-deductible health plan (HDHP) and have higher contribution limits.

What to Do if Your HFSA Card Doesn’t Work

1. Ensure the Purchase is Eligible: Verify that the item is on the HFSA-eligible expenses list.
2. Check Store Restrictions: Not all stores accept HFSA cards. Some may need to update their systems to recognize HFSA-eligible purchases.
3. Call Your HFSA Provider: If your card is declined for an eligible expense, contact your HFSA provider to clarify any issues or restrictions.

Final Thoughts

An HFSA is a smart way to save on healthcare expenses and taxes, but it’s important to know how it works, what you can use it for, and how to make the most of it. If you have predictable medical costs and are comfortable estimating your expenses for the year, an HFSA can be a valuable tool. Just remember to keep track of your spending to avoid losing unused funds at the end of the plan year.