Military Finances 201:Making Sense of HSAs and FSAs

With family health insurance premiums rising 297 percent since 2000, averaging over $25,000 annually, some employees feel the squeeze. Deductibles, too, have jumped nearly 50 percent over the last decade, further increasing out-of-pocket expenses. Granted, as a military member or retiree you probably didn't see increases like this. That doesn't mean you shouldn't look for ways to reduce your healthcare expenses. Understanding and using Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) can help families take more control of expenses.¹

What Are HSAs and FSAs?

HSAs and FSAs are special accounts designed to help manage medical expenses.

If you have an HSA, you must also be enrolled in a high-deductible health plan (HDHP). You contribute to the account, and your employer can also choose to contribute. Funds roll over from year to year. That means if you're on Active Duty or retired from the military and are covered by Tricare, you probably won't qualify for an HSA.

FSAs are usually employer-sponsored accounts. You contribute pretax dollars through payroll deductions. However, the funds must typically be used within the plan year unless your employer offers a grace period or limited rollover.

Both accounts allow you to use pretax dollars to pay for qualified medical expenses, such as copays, prescriptions, or over-the-counter medications. The one that may be best for you can depend on many factors.

Key Differences Between HSAs and FSAs

Feature	HSA	FSA
Who owns the account?	You	Your employer
Contributions	You and your employer	You (via paycheck deductions)
Funds roll over?	Yes	Sometimes (depends on employer rules)
Investment options	Yes	No
Portability (can you take it with you?)	Yes	No

Contribution Limits:

For 2025, the IRS allows individuals to contribute up to $4,300 and families up to $8,550 to an HSA. People over 55 can contribute an extra $1,000 annually. The FSA has a contribution limit of $3,300 ($6,600 for households).^2,3

Why These Accounts Matter More Than Ever

Rising premiums and deductibles mean Americans are shouldering more health care costs than ever. Since 2000, workers’ out-of-pocket costs for health insurance have nearly quadrupled. Today, it takes over five weeks of full-time work to pay the employee share of premiums, and this is before a single doctor's visit. Moreover, deductibles for families can exceed $3,700.¹As mentioned above, you probably don't pay this much, but that doesn't mean you shouldn't try to save money.

Employers are also increasingly shifting healthcare costs to workers through narrower provider networks, more prior authorizations, and tiered drug pricing systems. That’s where HSAs and FSAs come in. By allowing workers to set aside pretax money, these accounts help manage healthcare costs and create a strategy for expected and unexpected expenses.

Remember that if you spend your HSA funds for non-qualified expenses before age 65, you may be required to pay ordinary income tax and a 20 percent penalty. After age 65, non-qualified expenses are taxed as ordinary income taxes on HSA funds, and no penalty applies. HSA contributions are exempt from federal income tax but not from state taxes in certain states.

Real-Life Scenarios Where HSAs and FSAs Help

Having a Baby: New parents can face an increase in health-related costs, ranging from prenatal care and delivery to postnatal checkups and baby essentials. An FSA can help cover many of these expenses with pretax funds, whereas an HSA can carry over unused funds for future pediatric visits.
Chronic Illness Diagnosis: Copays, prescriptions, and specialist visits add up quickly. An HSA or FSA can manage the blow, and an HSA with investment options that are available with some plans.
Caring for Aging Parents: From prescriptions to home health aides, caregiving costs can be significant. FSAs can help cover some expenses, and for those with HDHPs, an HSA provides a long-term strategy for health-related caregiving costs.

Other HSA/FSA Tips

Use online calculators to see what might work for you.
Prepare for known medical expenses to use funds strategically.
Monitor your balances online and review your list of eligible expenses.
If you have an HSA, see if there is an investment option associated with the account.

Remember: during any qualifying life event, like marriage, a new child, or a job change, review your options because these events may allow you to enroll in or adjust your benefits outside Open Enrollment.

Final Thoughts

Understanding how HSAs and FSAs work and using them effectively can make a meaningful difference during life’s most important transitions.

If you haven’t explored these options, now may be the time to start.

Military Finances are Different

As mentioned in the article military members and retirees have really good health coverage. Your employer's HR department may not know that, and they may entice you to sign up for a HDHP and HSA that you're not eligible for. That could be a problem come tax time. A financial advisor that understands military benefits could help you avoid that situation. That's why we think Active and Retired Senior Military Officers and NCOs should work with a financial advisor or planner that deals with your unique situation every day. If you'd like to find out how we work with clients just like you, use the button below to schedule a free, initial consultation.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 201: Say Hello to IRMAA

Retired Military Finances 101: Don't Lose Your TRICARE

How Much Will I Pay for Tricare for Life?

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.