Health Savings or Flexible Spending Account?
HSA, FSA – the list of acronyms for employee health benefits in the US can be confusing. Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) are two types of tax-favored health plans that employers can offer as part of their health benefits, but they are not stand-alone plans. The type of account you have depends on other benefits offered by the company.
HSA vs. FSA: Important Differences
An HSA is an account that is set up as part of a high-deductible health insurance plan (HDHP) and you are not covered under another health plan (there are some exceptions). With a high-deductible plan, you will pay for your medical expenses throughout the year until you reach the deductible of the plan. When you have an HSA, you can use the money in your account for qualified medical expenses. These are tax-free distributions that help you pay for these expenses. The money invested in the HSA can be withdrawn from the account when the employee reaches 65. If they use the money for non-medical expenses before 65, there are tax penalties imposed on the employee.
An FSA is similar in that it is an account that is set up to help pay for qualified medical expenses. Employees allocate pre-tax dollars to the account and they can later receive reimbursements from the company to help cover these expenses. In some cases, an employer may also contribute to the plan. The employee submits proof of medical expenses to their FSA administrator and will receive a reimbursement for those expenses.
Employees that have an HSA can also contribute to a limited-purpose FSA, which can only be used for vision and dental expenses (not medical expenses). These plans work in the same way as the FSA, with only the limitations on the types of expenses reimbursed.
A big difference between the HSA and the FSA is the fact that an FSA is a “use-it-or-lose-it” plan. Employers are allowed to provide a grace period or carryover amount the following year, but these amounts are subject to tax law. With an HSA, the amount left in the account at the end of the year is rolled over to the following year.
Eligible Expenses
Eligible or qualifying expenses are the same for both an FSA and HSA. These are outlined in IRS Publication 502, which is updated annually. In general, these expenses include payments to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners. It also includes prescription drugs and insulin, inpatient hospital care, and more. These included expenses incurred by you or your spouse, dependents (that you claim on your tax return), and children under the age of 27 (FSA only).
With an FSA, you cannot use the account to pay for health insurance premiums, amounts paid for long-term care coverage and expenses, and amounts that are covered under another health plan. However, you can use the FSA for childcare expenses.
Contribution Limits, Ownership, Access to Money
One consideration for employers is how employees will benefit from these plans and how they will get value from them. You can speak with a health savings administrator to discuss your company’s individual needs, but there are restrictions on these plans as set by law.
Contribution limits
In 2019, employees can contribute $2,700 to their health FSA. This amount can also be contributed to limited-purpose FSAs. Employers may choose a lower contribution limit as well.
In 2019, employees and employers can contribute a combined maximum of $3,500 to an employee-only HSA or $7,000 for a family HSA.
Contributions change on a yearly basis, so companies should take care to find out what the following years’ contribution limit will be before the re-enrollment period.
Ownership
An FSA stays with the employer. If an employee leaves the company, they lose access to the account.
An HSA is not linked to the employer. Employees can take these amounts with them, as long as they maintain the requirements to stay in the plan.
Access to Money
An FSA gives employees complete access to the annual election at any time, even if the full amount has not yet been contributed. Employees must choose the contribution amount at the beginning of the year and cannot change it.
With an HSA, the employee only has access to the amount available in their HSA account. The account holder can change the contribution amount throughout the year, as long as they do not exceed the maximums.
At a Glance Comparison
| Flexible Spending Account | Health Savings Account |
|---|---|
| Who can have this plan? | |
| – Anyone who’s employer has set up this plan – Self-employed individuals not eligible – Certain limitations apply for highly compensated employees and key employees. – Employees with an HSA can only have a limited purpose FSA. |
– Employees covered by an HDHP – No other health coverage (some exceptions apply) – Not enrolled in Medicare – Not a dependent on someone else’s tax return |
| Contribution limits | |
| – $2,700 in 2019, unless the employer sets a lower limit. – Once an amount is selected, it cannot be changed. |
– $3,500 for an employee-only HSA or $7,000 for a family HSA in 2019. – Contributions can be changed during the plan year. |
| What happens if I leave my employer? | |
| An FSA is owned by the employer. If you leave the company, you lose access to those funds. | An HSA belongs to the employee. You retain the money and can take it with you to a new employer. |
| What happens at the end of the plan year? | |
| An FSA is a “use-it-or-lose-it” plan. Employers can set up a grace period or carryover amount, but employees need to check their plan details. A grace period allows employees an additional 2.5 months to incur expenses into the following year. A carryover allows employees to rollover up to $500 in unused funds to the following plan year. Other than these two exceptions, all money in the fund is forfeited after the plan year. | The money is rolled over to the following year. |
Advantages
Both plans offer tax benefits to employees and employers. They also both help employees with their health-related expenses, which can be expensive and a source of stress for employees. Most employees consider good health benefits as an important factor when choosing a job.
Exactly which plan works best for your company will depend on factors that are unique to the company and the employee population. The choices available for health insurance are not limited to only HSAs and FSAs. In fact, FSAs are not a good stand-alone health plan. They should be used in conjunction with another health insurance option because the funds are only available for one year and do not accrue over time.
An HSA is used with an HDHP as well. The money in the HSA is used to cover qualified medical expenses until the deductible is reached. In 2019, an HDHP must have a minimum deductible of $1,350 for individual plans or $2,700 for families. The out-of-pocket limit for HDHPs in 2019 is $6,750 for individuals and $13,500 for families. It is also important that employees understand they cannot be covered under another health insurance plan with an HSA, for example, if they have a spouse with a health plan.
Employers have many choices when it comes to offering their employees health insurance. Employees appreciate flexibility and choice in their health care. Both HSAs and FSAs offer flexibility and choice for employees.
Offering an FSA or an HSA plan for your employees will keep them satisfied and also reduce your employer taxes.
Thinking about offering these benefits for your employees and don’t have an exact idea on how to do it? Vantage Point’s easy-to-use, transparent and intuitive technology will come in handy when making these decisions.
For more information please contact Mike Moncada: 516.599.2120 ext. 114 or mike@vantagepointbenefit.com.