What are the rollover rules for HSAs and FSAs?

Understanding Rollover Rules for HSAs and FSAs

Navigating the world of health savings💡 Definition:A tax-advantaged savings account for medical expenses, available only with high-deductible health plans. accounts (HSAs) and flexible spending💡 Definition:A pre-tax account for medical expenses that must be used within the plan year or you lose the money (use-it-or-lose-it rule). accounts (FSAs) can be confusing, especially when it comes to understanding how unused funds roll over from one year to the next. This article will💡 Definition:A will is a legal document that specifies how your assets should be distributed after your death, ensuring your wishes are honored. clarify the rollover rules for both HSAs and FSAs, helping you make informed decisions about your contributions and spending.

HSA Rollover Rules: Unlimited Flexibility

Health Savings Accounts (HSAs) offer unmatched flexibility when it comes to rolling over funds. Here are the key points:

• Unlimited Rollover: All unused funds in an HSA carry over from year to year with no expiration. This makes HSAs an excellent tool for long-term savings and retirement💡 Definition:Retirement is the planned cessation of work, allowing you to enjoy life without financial stress. planning.
• Portability: The account is yours, regardless of employment status. If you change jobs or retire, your HSA stays with you.
• Contribution Limits: While rollovers are unlimited, annual contribution limits still apply. For 2025, the limit is $3,300 for self-only coverage and $6,750 for family coverage.

HSAs are designed to encourage saving for future medical expenses, providing peace of mind that your contributions will remain accessible without penalty.

FSA Rollover Rules: Use It or Lose It, with Options💡 Definition:Options are contracts that grant the right to buy or sell an asset at a set price, offering potential profit with limited risk.

Flexible Spending Accounts (FSAs) traditionally operated on a "use-it-or-lose-it" basis💡 Definition:The original purchase price of an investment, used to calculate capital gains or losses when you sell., but recent modifications allow for some flexibility:

• Rollover or Grace Period💡 Definition:Interest-free period (21-25 days) between purchase and payment due date. Only applies if you pay statement balance in full each month.: Employers may offer either a rollover of up to $660 (2025 limit) to the next plan year or a 2.5-month grace period to spend remaining funds. Employers choose one option; you cannot have both.
• Health and Limited-Purpose FSAs: These accounts are eligible for rollovers, but dependent care FSAs are not.
• Rollover Funds: Rolled-over amounts do not count toward your new plan year's contribution limit💡 Definition:A contribution limit is the maximum amount you can legally invest in a financial account, helping you save effectively. ($3,300 for 2025). Rolled-over funds are typically used first.
• Employer Discretion: The rollover amount and option availability depend on your employer's plan, so checking with HR is crucial during open enrollment💡 Definition:Open Enrollment is a designated period to enroll in health coverage, vital for ensuring access to medical services..

Real-World Example

Imagine you contribute $2,000 to your health FSA but only use $970 on medical expenses. If your employer offers a $660 rollover, you can carry over $660 to the next year, forfeiting the remaining $370. Alternatively, if a grace period is available, you have until mid-March to spend the leftover $1,030.

Common Mistakes and Considerations

• Overestimating Contributions: With FSAs, it’s vital to accurately predict expenses to avoid forfeiting funds. Opt for conservative estimates if unsure.
• Verify Plan Details: Since FSA rules vary by employer, review your plan's specifics during open enrollment. This ensures you understand whether a rollover or grace period applies.
• Eligible Expenses: Ensure you're aware of what qualifies as an eligible expense. FSAs cover a range of health-related costs, including copays and certain over-the-counter items.

Bottom Line

HSAs provide unmatched rollover flexibility, making them ideal for long-term savings. FSAs, while less flexible, offer some options through employer-provided rollovers or grace periods. The key is understanding your employer's specific rules and planning your contributions accordingly. By doing so, you can maximize the benefits of these accounts and avoid losing hard-earned money.

Understanding these rules empowers you to make informed decisions about your health savings, ensuring that your contributions are used wisely and effectively.