The Ides of March Have Come and Gone. That Was Easy for HSA Owners!

Unlike many of their co-workers enrolled in Health FSAs, Health Savings Account owners don't fear March 15 and March 31.

Julius Caesar's final March 15 wasn't a good day. That fateful day, as well as March 31, often create anxiety among Health FSA participants. But Health Savings Account owners sleep soundly on the eve of each day.

Why is that?

March 15

More than half of all FSA plans run on the calendar year, either because they align with medical and other employee benefits or the company chooses the calendar year to provide easier compliance for employees (particularly for the Dependent Care FSA, also referred to as a Dependent Care Reimbursement Account, or DCRA). And a number of employers have attached a grace period to their FSA plans.

The grace period gives employees an additional two months and 15 days to spend their balances. This provision limits the risk of employees' forfeiting unused balances at the end of the year by giving them not 12, but 14 and a half, months to spend their elections. And because the grace period overlaps with the new plan year, participants can spend both years' elections to reimburse an expensive service like vision-correction surgery, multiple dental implants or crowns, or heading aids during this window of time.

Though the grace period reduces the risk of forfeiting unused balances, participants ultimately lose any remaining dollars in their accounts that they don't use within 14 and a half months. Thus, the days leading up to March 15 can be anxiety-filled as participants scramble to spend every last dollar. Fortunately, two developments in recent years have sucked much of the stress out of this process for those who are aware of these changes:

1. Effective Jan. 1, 2020, over-the-counter drugs and medicine are once against qualified expenses without a prescription required. Thus, participants can load up on cough suppressants, ibuprofen, flu medicine, and digestive aids that they regularly use. And they can purchase a bathroom scale, first-aid kit for home or vehicle, and many other supplies or medical equipment. And menstrual-care products are now a qualified expense, giving participants a wider range of products on which to spend their elections.
2. Participants can shop at merchants like FSA Store and Amazon to view the full range of qualified over-the-counter drugs, medicine, equipment, and supplies. FSA Store sells only qualified items. Amazon has a sort feature that displays only qualified items.

March 31

Most plans impose a 90-day claims-runout period (though check with your employer of FSA plan administrator - your runout period may be longer or shorter). Because FSAs operate on distinct plan years, at some point after the end of the year the plan must be closed and activity reconciled. The most common claims-out period is 90 days after the end of the plan year, or March 31 for calendar-year plans.

This deadline may set off a mad scramble to find missing receipts for dental services, glasses or contact lenses, or a medical expense applied to the deductible. Fortunately, in most cases, someone else - your dentist, optometrist, or health plan - has a record of these purchases. But you may have to run around, in the car or online, to gather these documents and submit a manual claim for reimbursement or to substantiate a debit-card transaction. If you fail to submit the proper documentation with the four Ds (Date of service, Doctor or medical provider, Description of the expense, and the name of the Dependent for whom the purchase was made), you typically lose your opportunity to claim that portion of your election.

The Health Savings Account Advantage

Although Health FSAs participants and Health Savings Accounts owners enjoy the same tax savings (no federal income or payroll taxes, and no state income taxes in most states) and treatment of distributions (tax-free for qualified expenses), they work very differently in important ways. Here are several differences that are directly related to our discussion:

Health Savings Accounts have no plan years. Unlike a Health FSA, Health Savings Accounts aren't structured as annual reimbursement plans. Rather, they are lifetime personal financial accounts. As such, they have a beginning date - the date of establishment, which is usually the day that the first deposit is posted - but no end date. With no end date, owners aren't scrambling to submit paperwork at the 11th hour.

Health Savings Accounts don't have claims-submission deadlines. Unlike Health FSA participants, Health Savings Account owners don't face a deadline to reimburse a qualified expense. If the date of service is on or after the day that the account is established, the expenses can be reimbursed at any point in the future. Many owners use their accounts like a Health FSA, reimbursing expenses as soon as they incur them. Other owners often pay for small items with personal funds, save the receipts, and retain the option to reimburse the expense years later, and watch their balances grow in the meantime.

Important note: Health FSA administrators are required to ask for documentation to substantiate an expense, since elections can be used only for qualified expenses. In contrast, Health Savings Account balances can be used for qualified and non-qualified expenses (although distributions for the latter are included in taxable income and are subject to an additional 20% tax unless the account owner is age 65 or older, or is disabled). Health Savings Account administrators and employers aren't permitted to require substantiation. But account owners must retain appropriate documentation in their tax files to verify their tax reporting if their personal income tax return is chosen for audit.

Health Savings Account owners don't have to use multiple years' elections to fund an expensive qualified expense. Unlike Health FSA participants, Health Savings Account owners can save for large expenses or increase their contributions in a single year to reimburse a qualified high-ticket service. Contribution limits ($3,650 for self-only and $7,300 for family coverage in 2022, plus an additional $1,000 if age 55 or older) are much higher than Health FSA election limits ($2,850 per plan per year, although employers can choose a lower figure). And although Health FSA participants are bound to an annual election that they can't change just because they face an unexpected expense, Health Savings Account owners can adjust their contributions at any time to reimburse a high qualified expense now (or use past or future contributions to pay the bill).

The Bottom Line

Health FSAs are a great tool to help hardworking Americans manage their out-of-pocket health-related costs. They offer the same immediate tax savings as Health Savings Accounts with fewer requirements to qualify to participate and cash-flow benefits that Health Savings Accounts typically don't offer.

But because of differences in the structures of the two accounts, Health Savings Account owners sleep better than some Health FSA participants this time of year. (And if they still don't enjoy restful slumber, most sleep aids are a qualified expense under both plans.) They face no deadlines because their account is timeless. They don't have to schedule non-urgent services in periods in which plan years overlap. And they don't have to respond to time-sensitive requests to provide proper documentation of their expenses. That's a recipe for better sleep, less stress, and perhaps more time to walk the dog.

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