Benefits and Compensation

The Importance of Compliance: HSA and FSA Tips and Reminders

It’s open enrollment season: time for HR professionals to help employees evaluate and make important decisions about their health and financial benefits. Among those choices are flexible spending accounts (FSAs) and health savings accounts (HSAs), popular options that can play a central role in protecting the health and financial futures of employees. To make it easier for HR teams to respond to employee questions, and to ensure employee and company compliance, here’s an open enrollment primer on FSA and HSA basics.

How Funds Can Be Used

One of the most common reasons for not enrolling in an HSA or FSA is that individuals don’t understand the breadth of what’s eligible. Many participants are surprised to learn that these funds cover not only doctor visits and medical procedures, but everyday health essentials, such as sunscreen, over-the-counter medicines, acne medication, pain relief devices, telehealth services, and more.

While products that are cosmetic or for general health or personal hygiene—like toothpaste and shampoo—are not eligible, “dual purpose” expenses can meet both a medical and personal need, depending upon the situation. For example, air purifiers or nutritional supplements may be eligible with a letter of medical necessity (LMN) from a licensed healthcare provider recommending the expense for treatment or mitigation of a diagnosed medical condition. Employees should check with their account administrator in these situations.

Account Ownership

FSAs are owned by the employer, and if employment terminates, unused funds stay with the plan. HSAs, on the other hand, are owned by the employee and unused funds roll over from year to year and belong to the employee regardless of job status and even in retirement.

Who Can Enroll

To enroll in an FSA, employees need only to be enrolled in the employer’s group health plan. To open and contribute to an HSA, employees must be enrolled in a qualified high-deductible health plan (HDHP), either through their employer or through a state or federal insurance marketplace. Employees with medical coverage outside of the HDHP (through Medicare for example), are not eligible to open or contribute to an HSA. While FSAs can cover dependents, including children through age 26, HSAs can only cover expenses for qualified tax dependents.

Dual Enrollment

Employees often ask if they can be covered by both an FSA and HSA at the same time. While a traditional healthcare FSA that covers all qualified medical expenses would disqualify an employee from opening or contributing to an HSA, since the IRS does not allow any type of first dollar medical coverage outside of the HDHP for purposes of HSA contributions, there are two types of FSAs that can be paired with an active HSA. A limited purpose FSA (LPFSA) can be paired with an HSA because it only covers dental and vision expenses. The other, less common option is a post-deductible FSA, which functions as a limited-purpose FSA until the employee has met the minimum HDHP deductible, at which time it opens up to cover all qualified medical expenses.

Contribution Limits

Annual contribution limits for FSAs and HSAs are established by the Internal Revenue Service (IRS). For 2025, the contribution limits for HSAs are $4,300 for individual enrollment in an HDHP and $8,550 for family coverage. Employers can also contribute to an employee’s HSA, but the combined contribution from the employee and employer cannot exceed the annual limit. While 2025 FSA contribution limits are not likely to be announced by the IRS until later this fall, Mercer has projected a 5% increase to $3,300. It is important to understand that this limit applies to pre-tax employee contributions, and that employers can contribute beyond the cap.

Spending Deadlines

While HSA funds never expire and roll over from year to year, even in retirement, FSA dollars must be spent by the participant by the end of the plan year, or the funds may be forfeited back to the employer. The only exception to this rule is if the employer offers a deadline extension, such as a grace period, which gives the participant an extra 2.5 months after the end of the plan year to incur new expenses and spend down any remaining funds. For example, for a plan ending December 31, employees would have until March 15 to spend any remaining dollars.

Employers may also offer a rollover or carryover. This feature lets employees carry over a specific amount of unused funds into the new plan year without counting against the new contribution limit. The maximum carryover is set each year by the IRS. The 2025 FSA carryover has not yet been announced, but Mercer is projecting an allowable carryover of $660. Employers can offer one of these extension options; but they cannot offer both a grace period and rollover at the same time.

Save or Spend?

HSAs are unique in that funds can be used to pay for health needs now, or in retirement. That’s why account holders who are 55 and older can contribute an additional $1,000 beyond the annual limit through what is known as a catch-up contribution. However, once individuals enroll in Medicare, they are no longer eligible to contribute to their HSA, but they can still use existing funds to pay for qualified medical expenses. After 65, account holders can withdraw money from their HSAs for non-qualified expenses without penalty, however, those withdrawals are taxed as income. HSA account holders may also invest a portion of their unused HSA balance into stocks, bonds, and mutual funds (as long as their HSA administrator offers this option).

Claims Substantiation and Tax erification

While FSA expenses are substantiated and approved by an account administrator, HSA purchases are not. That means the HSA user is responsible for proving eligibility for all expenses, in the event they are ever audited by the IRS. Employees should be aware that HSA withdrawals for ineligible expenses are subject to a 20% penalty and income tax by the IRS. Encourage employees to use an HSA Expense Tracker to keep their receipts in order.

It’s important to stay current with IRS guidelines and other changes to FSA and HSA accounts, to ensure employees use–and get the most value from–these important financial benefits, and also to protect the integrity of your company’s benefits. The Resource Centers at FSA Store and HSA Store offer a wealth of educational resources, tools, and eligibility information to support HR teams and employees throughout the year.  

Joseph Giordano is compliance manager at Health-E Commerce, parent brand to FSA Store and HSA Store. He is actively involved in the flexible compensation industry and with advocacy to ensure that FSA and HSA eligibility meets changing consumer needs.

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