Can you move an FSA into a HSA?

A Flexible Spending Account (FSA) is a tax-advantaged financial account offered in the United States, typically as part of an employee benefits package. It allows individuals to set aside a portion of their pre-tax earnings to pay for qualified healthcare or dependent care expenses. By using pre-tax dollars, FSAs help reduce taxable income, which can lower overall tax liability and make certain expenses more affordable.

FSAs are governed by rules established by the Internal Revenue Service (IRS) and are commonly used to pay for a variety of out-of-pocket healthcare costs. These can include copayments, deductibles, prescription medications, and some over-the-counter items. FSAs are especially beneficial for covering predictable medical expenses that aren’t fully covered by health insurance, such as eyeglasses, dental work, or physical therapy.

Employers sponsor FSAs, and employees decide how much money to contribute at the beginning of the plan year. Contributions are deducted from paychecks in equal installments over the year and are not subject to federal income tax, Social Security tax, or Medicare tax. This tax advantage can lead to significant savings, particularly for individuals with regular healthcare expenses.

One key feature of FSAs is that they are often subject to a “use-it-or-lose-it” rule, meaning any funds not spent by the end of the plan year (or grace period, if offered by the employer) are forfeited. Some employers allow a small carryover of funds, typically up to $610 (as of 2024), or provide a grace period of up to 2.5 months to use remaining funds. Employees must carefully estimate their expected expenses to avoid losing unused contributions.

FSAs can also be established for dependent care expenses, known as Dependent Care FSAs or DCFSAs, which cover costs such as childcare, eldercare, or day camps. These accounts operate under similar principles but are limited to expenses incurred for dependent care that enables the account holder to work.

Healthcare FSAs are distinct from other tax-advantaged accounts like Health Savings Accounts (HSAs), as they do not require individuals to be enrolled in a high-deductible health plan (HDHP). However, FSAs are tied to employment, meaning the funds are generally forfeited if the individual leaves their job, unless COBRA continuation coverage is elected.

An FSA is a powerful tool for managing healthcare or dependent care costs while reducing taxable income. It provides a financial cushion for medical expenses not fully covered by insurance and promotes proactive financial planning for predictable healthcare needs. Proper management and planning are essential to maximize the benefits of an FSA and avoid losing unused funds.

A Health Savings Account (HSA) is a tax-advantaged savings account available to individuals in the United States who are enrolled in a high-deductible health plan (HDHP). HSAs are designed to help people save and pay for qualified medical expenses, such as deductibles, copayments, prescriptions, and other out-of-pocket healthcare costs.

Contributions to an HSA are made with pre-tax dollars, which reduces taxable income, and the funds in the account grow tax-free. Withdrawals from the HSA are also tax-free, provided they are used for qualified medical expenses as defined by the Internal Revenue Service (IRS). This triple tax advantage—pre-tax contributions, tax-free growth, and tax-free withdrawals—makes HSAs a powerful tool for managing healthcare costs and saving for future medical needs.

To be eligible for an HSA, an individual must be enrolled in a high-deductible health plan (HDHP), which requires higher out-of-pocket costs before insurance begins to cover expenses. In 2024, for example, an HDHP is defined as a plan with a minimum deductible of $1,600 for individuals and $3,200 for families, along with a maximum out-of-pocket limit of $8,050 for individuals and $16,100 for families. These thresholds encourage individuals to take a more active role in managing their healthcare spending.

One of the unique features of an HSA is that the funds belong to the account holder and roll over year after year. Unlike Flexible Spending Accounts (FSAs), which often have a “use-it-or-lose-it” rule, HSA balances do not expire. This makes HSAs particularly beneficial for long-term savings, as unused funds can accumulate over time and be invested in various financial instruments, such as stocks, bonds, or mutual funds, to grow wealth for future medical expenses or even retirement.

After the age of 65, HSA funds can be used for non-medical expenses without penalty, though withdrawals for non-qualified expenses are taxed as ordinary income. This flexibility adds an additional dimension to HSAs, making them a hybrid tool for both healthcare savings and retirement planning.

HSAs are portable, meaning they remain with the account holder even if they change jobs, switch insurance plans, or retire. Contributions can be made by the individual, their employer, or both, and employers often offer HSAs as part of their benefits package.

An HSA is a versatile and tax-advantaged account designed to help individuals with high-deductible health plans save for and manage healthcare expenses. Its flexibility, portability, and ability to grow funds tax-free make it a valuable resource for covering current medical costs and planning for future financial security.

You cannot directly transfer funds from a Flexible Spending Account (FSA) into a Health Savings Account (HSA). FSAs and HSAs are governed by different tax rules and serve distinct purposes, which makes transferring funds between them prohibited. However, there are alternative strategies and benefits to consider when transitioning from an FSA to an HSA, depending on your situation.

FSAs are employer-owned accounts that operate on a “use-it-or-lose-it” basis, meaning any unspent funds at the end of the plan year (or grace period, if provided) are typically forfeited. On the other hand, HSAs are individually owned, and funds roll over year after year, making them portable and well-suited for long-term savings. The rules governing FSAs and HSAs are separate, and the IRS does not allow the direct transfer of funds from one account to another.

If you are moving from an FSA to an HSA, you will need to spend down your FSA funds before your new HSA takes effect. To maximize the value of your FSA, you can use it for eligible medical expenses during the coverage period. If your FSA plan has a grace period or allows a small carryover (typically up to $610 in 2024), you may need to time your transition carefully. Having a balance in your FSA or overlapping coverage can disqualify you from contributing to an HSA.

Some employers offer a Limited Purpose FSA (LPFSA) as part of their benefits, which works in conjunction with an HSA. An LPFSA can only be used for specific expenses like dental and vision care, allowing you to remain eligible for an HSA while still benefiting from FSA-like savings for certain categories of expenses.

While FSAs are useful for short-term healthcare spending, HSAs offer significant long-term advantages. HSAs allow you to save pre-tax dollars and invest unused funds, which grow tax-free over time. Unlike FSAs, HSA funds roll over indefinitely, and the account remains with you even if you change jobs or retire. HSAs also provide flexibility in retirement: after age 65, you can use HSA funds for non-medical expenses without a penalty (though they will be taxed as ordinary income).

The transition from an FSA to an HSA is particularly beneficial if you anticipate high medical expenses in the future or want to use the HSA as a supplemental retirement savings tool. By managing your transition carefully and taking advantage of tax-advantaged contributions, you can maximize the benefits of both accounts while ensuring compliance with IRS rules.