Understanding the Differences Between HSAs and FSAs
The difference between health savings account (HSA) and flexible spending account (FSA) can translate into potential money savings for you and your employees. It's important to understand how they differ and which is the best fit for you and your employees. An HSA and FSA are similar in that they both allow an individual to contribute tax-free to save for medical costs. But it’s important to understand what these accounts offer, along with their notable differences.
At its basis, HSAs are designed to encourage health care consumerism, while FSAs focus on using pretax dollars to cover expenses. Contributions to both accounts are made pretax, which can reduce taxable income. Shannon Britton, Paychex HR generalist, frequently explains the primary characteristics and differences of a HSA and FSA to her clients using the following:
- An HSA, which can be funded by employees, employers, or both, is designed to work specifically with a qualifying high deductible healthcare plan (HDHP) to allow tax-free payments of current and future qualified medical expenses. Contributions are automatically deducted from employee paychecks every pay period and deposited into their individual HSA account.
- A high deductible healthcare plan is advantageous for individuals who wish to pay for expenses out-of-pocket or want to go to out-of-network doctors. This is also true of the HSA.
- Withdrawals used for qualified medical expenses or health premiums after age 65 are tax-free. Any unused balances roll over from year to year, continually growing through investment earnings and additional contributions.
- An employee can take their HSA with them if they change jobs, but would need to remain covered by an HDHP to contribute.
- The maximum out-of-pocket for an HDHP in 2018 is $6,650 for individuals and $13,300 for families.
- An FSA is employer-established plan that pays for qualified medical and dependent-care expenses with pretax dollars, prior to federal withholding, FICA or state withholding taxes (in most states) being applied to the amount deducted from the employee’s pay. An FSA is typically funded solely by the employee, but employers may also contribute.
- You can offer a dependent-care FSA without offering a medical FSA.
- FSA out-of-pocket medical expenses can include (but aren't limited to): co-pays, deductibles, prescriptions, dental work, and eyeglasses or contacts.
- Up to $2,650 can be set aside for out-of-pocket medical expenses and $5,000 for dependent-care expenses in 2018.
FSA balances are subject to a "use it or lose it" scenario, requiring that an employee use all funds by December 31. However, there are options to help employees utilize the benefit rather than forfeit it. The grace period option allows employees to incur expenses that can be claimed against the prior year’s election by March 15th, and submit receipts by March 30, of the subsequent year. Or, an employer may include a carryover option that allows $500 of unused benefit to carry forward to the subsequent year’s expenses. Employers may choose the grace period or the rollover option, but not both.
Britton explains, "In my opinion, the rollover option is better, especially for employees who are hesitant to participate in a plan. I tell them to think about the expenses they know they will have such as monthly prescriptions, regular doctor visits, etc., and then budget conservatively."
Both types of accounts can make managing out-of-pocket medical expense easier throughout the year. When thinking about how much to contribute, figure in enough to cover deductibles, expected medication costs, regular doctor's visits, and any planned treatments or surgeries. An on-site HR professional can help educate you, your management staff, and your employees on the health insurance options that best meet your company’s specific needs.