Comparing Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs)

We recently wrote about health savings accounts (HSAs), as one way that employers can assist employees in better managing the costs of healthcare. Flexible spending accounts (FSAs) are another tool which awards employers and employees with tax savings. Most employees will be eligible for one or the other, but may have opportunity to maximize their savings and tax benefits by choosing both.

What is a flexible spending account?

A flexible spending account (FSA) is an account in an employee’s name that reimburses qualified health care or dependent care expenses. These qualified expenses are funded with pre-tax dollars deducted from the employee’s paychecks. The employee can receive cash reimbursement up to the total value of the account for covered expenses incurred during the benefit plan year and any applicable grace period.

Employees are not allowed to contribute to both an HSA as well as a FSA unless they use a limited-purpose FSA. In this arrangement, covered health care procedures are limited to dental, vision and preventive care. All other qualified medical expenses would be reimbursed by the HSA only.

Differences between FSAs and HSAs

FSAs and HSAs are different in a few ways. First, there are less eligibility requirements for an FSA; anyone eligible for the group medical plan, regardless of actually being enrolled, can participate in the Medical FSA. However, you can only contribute to an HSA when enrolled in a high-deductible health plan (HDHP). Second, an FSA is owned by the employer, while an HSA is owned by the employee. For an FSA, contributions can be adjusted during open enrollment only (or if they have a qualified event during the year, such as a marriage or divorce), while monthly contributions to an HSA can be adjusted throughout the year. This means, for FSAs, you have to predict your expenditures in advance. A good example would be if you are planning on having surgery or if your child will need braces.

FSAs and HSAs also have different annual contribution maximums, determined by the Internal Revenue Service (IRS) for each calendar year. The HSA annual contribution maximum increased from $3,450 to $3,500 for individuals from 2018 to 2019, and also increased from $6,900 to $7,000 per family. For the 2018 plan year, the maximum contribution limit for an FSA was $2,650, an increase over $50 over 2017. For 2019, the FSA maximum contribution increased to $2,700, a $50 increase from last year.

Another key difference between an FSA and an HSA is that FSAs are, for the most part “use it or lose it” – you forfeit any unused balance at the end of each year or can carry-forward a limited amount, while HSA funds rollover year after year. However, you can withdraw money from your medical FSA before the account is funded, to the amount totaling what you have chosen to contribute for the year. Dependent Care FSAs, and all HSAs, only allow you to withdraw what you have already contributed.  Finally, HSA funds follow you as you change jobs, while you’ll lose your FSA with a job change, except if you are eligible for continuation through COBRA. There may be a grace period or a carryover limit, decided by the employer.

Similarities between FSAs and HSAs

FSAs and HSAs each reimburse for qualified medical expenses, which include coinsurance, copayments, deductibles and prescriptions. (For a full list, please see federal tax code Section 213(d).) Employees determine the amount that they wish to contribute, and the funds are distributed on a pre-tax basis. Employers can also contribute to an employee’s FSA or HSA account if they choose. Both types of accounts are regulated by the IRS, and participants are strongly encouraged to save receipts to substantiate any distributions.

According to the 2018 SHRM Employee Benefits Survey, HSAs have increased in popularity with over 56% of employers offering them in 2018. In 2018, FSAs were offered by 63% of employers, a rate which has declined from 68% in 2014. As an employee, during open enrollment, take a look at whether or not your employer offers the option for an HSA or FSA and use this comparison to help decide the right choice for you.

To help determine if an FSA or an HSA is the right option for you or for further clarification on how much you may save in taxes, contact Rose & Kiernan, Inc. here or by calling (800) 242-4433. Advice given in this article is for information purposes only and are not intended to replace the advice of an insurance professional.

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