Health-E Commerce (parent brand of FSAstore.com, HSAstore.com and WellDeservedHealth.com) has created Tax-Free Better as a way to advocate for the expansion of tax-free healthcare accounts. We call attention to issues that directly affect account holders to better support the health and wellness of all Americans. 

Our mission is to make tax-free healthcare more usable and versatile for the millions of working professionals and families who rely on these accounts to control their medical expenses.

What is tax-free healthcare?

Tax-free healthcare refers to health benefits that allow American families to set aside pretax money to cover qualified, out-of-pocket medical expenses not covered by their health insurance. These include benefits such as flexible spending accounts (FSAs), health savings accounts (HSAs), health reimbursement arrangements (HRAs), and more.

Today, 70+ million Americans use benefits like FSAs and HSAs, but because of confusing regulations and gaps in coverage, many millions are unable to take advantage of these accounts. Let’s explore how these accounts work and what determines product and service eligibility.

Flexible Spending Account (FSA)

A medical flexible spending account (FSA) is an employer-sponsored healthcare benefit that allows employees to set aside up to $3,050 (for 2023 and indexed each year for inflation) annually to cover the cost of qualified medical expenses. It’s a lot like a savings account, but used for qualified healthcare costs. FSAs work on an annual plan-year and are funded through regular payroll deductions on a pre-tax basis. With a few exceptions, these funds are subject to a use-it-or-lose-it rule, which means that any funds that are unspent by the end of each plan year are forfeited to the account holder’s employer.

But this isn’t the only type of FSA out there! There are also limited care flexible spending accounts — designed to cover dental and vision benefits tax-free — and dependent care flexible spending accounts that cover child and adult dependent care expenses such as in-home care, before/after school child care, summer day camps and more.

Key Benefits of an FSA:

  • FSAs help working families cut their yearly tax burden by protecting a part of their income from payroll taxes. In fact, an FSA user who contributes the full contribution for 2023 ($3,050), and earns the U.S. median household income ($70,784), could realize up to $1,000 in tax savings.
  • By paying with tax-free funds, account holders can save on common medical expenses like co-payments, annual physical exams, specialist visits and more.
  • FSAs also cover thousands of qualifying medical products including over-the-counter medicines, first aid products, feminine care products, personal protective equipment (PPE) to safeguard against COVID-19, home health diagnostic devices, corrective vision aids and accessories, maternity and prenatal care supplies, and much more.

Health Savings Account (HSA)

A health savings account (HSA) is a personal healthcare account that covers qualified medical expenses. Unlike an FSA, HSAs do not have deadlines and funds roll over from year to year making them great supplementary savings accounts for the future. For 2023, you can contribute up to $3,850 to an HSA as an individual participant of the health plan, and up to $7,750 for family health plan coverage.

HSAs belong to the account holder, so if you leave a job where you have contributed to an HSA, you can bring along this portable asset to your next position. HSAs are only available in tandem with qualified high-deductible health plans (HDHPs), so you can only contribute to an HSA if you’re enrolled in one.

Key Benefits of an HSA

  • HSAs offer a unique “triple tax benefit.” HSA contributions, withdrawals for qualified medical expenses, and gains on your contributions (through interest or investment) are all non-taxable. Additionally, any unspent funds roll over each year and funds are never lost.
  • HSAs have similar eligibility requirements as FSAs, so they can help account holders cover the cost of co-payments, doctor visits, and thousands of qualifying medical products. Additionally, HSAs can cover a few premiums that an FSA can not.
  • Another unique benefit of an HSA is its ability to act as a retirement savings supplement. Withdrawals from an HSA for non-medical expenses are taxed as income and carry a 20 percent penalty, but once account holders reach Medicare eligibility at age 65, they can withdraw these funds for non-medical expenses and only pay income taxes)
  • Account holders aged 55 and older can contribute an additional $1,000 per year above the annual maximum as a “catch up contribution” to supercharge their savings.

How does tax-free healthcare benefit employers?

According to the 2019 SHRM Employee Benefits Report, 68%of employers offered a medical flexible spending account in 2019, while 59% offered a high-deductible health plan compatible with an HSA. As vital as FSAs and HSAs are for the financial bottom lines of millions of Americans, employers also have direct incentive to offer them to their employees.

  • Creating an FSA or HSA benefits program allows employers to reduce their employee benefits expenditures to save on FICA/FUTA (payroll) taxes
  • FSA and HSA benefits programs are helpful recruiting tools in attracting new employees, and in some cases, employers may offer contribution assistance to bolster enrollment.
  • Tax-free healthcare programs can help drive down healthcare costs — allowing employees to have skin in the game helps them better manage their out-of-pocket costs, and they are more likely to make better, informed decisions related to their medical care.

Who determines what is a qualified health expense?

The IRS determines what is an eligible medical expense based on IRS 213(d), the regulation in the tax code that defines “medical care”:

“The term ‘medical care’ means amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.”

For more information on what is currently covered by FSAs and HSAs, feel free to explore our comprehensive Eligibility List for more details.