My pal Jane had another misadventure in the health system – this time with her benefits card. This debit card (and there are millions of them in circulation today) typically enables the consumer to charge eligible health expenditures and deduct them directly from their account(s). Jane, my ever frugal and increasingly savvy friend, set up both a Health Savings Account (HSA) and was given a limited-scope Flexible Spending Account (FSA), funded in part by her employer.
Jane wisely has taken the savings in her premiums (the difference between the high deductible health plan that was HSA-eligible, and a richer, more expensive plan) and has been depositing them in her tax-preferred HSA. Her hope is not to use the funds and have the amount grow like an Individual Retirement Account (IRA).
Imagine Jane’s surprise when she went to pay for new glasses and discovered after the fact that the cost was deducted not from her FSA but from her HSA. As we know, eyeglasses are eligible for reimbursement from both accounts, and her limited-scope FSA is specifically for dental and vision expenses. The difference is that her FSA is “use it or lose it,” where her HSA is her money and is not on a “use it or lose it” schedule. Clearly Jane is motivated to exhaust the FSA funds before she dips into her HSA.
The solution? The account administrator told her to make a different expenditure using her FSA and then apply for reimbursement from her HSA. Jane knows orange is the new black, but unfortunately the color orange doesn’t look good on her.
What is the lesson here? If a limited-scope FSA is being offered in conjunction with an HSA, ensure that the benefit card and underlying account management is set up so the “use it or lose it” funds are used first. If it really is the intent of the employer to defray some out-of-pocket expenses for employees, then the configuration of systems should deliver on that goal.