Understanding the differences between HSAs and FSAs can be tricky. Learn how to make the most of your employee benefits by recognizing the differences and similarities of each account.
With ever-rising healthcare costs, many employers choose to provide medical plans that allow employees to customize their coverage based on individual needs. By incorporating health savings accounts (HSAs) or flexible spending accounts (FSAs), employers can help their employees manage rising costs.
Medical plans that include HSAs and FSAs cover a wide range of medical expenses. With this comes the potential higher costs for employees, such as higher deductibles. Yet these accounts also enable employees to cover out-of-pocket medical expenses on a tax-free basis.
As with any account, HSAs and FSAs come with rules and limitations that employers and employees need to understand to make the most of their benefits:
An HSA is a tax-exempt account owned by the employee. Upon termination or retirement, the employee gets to keep the account.
While HSAs are favored for tax purposes, they have strict rules regarding eligibility and contributions. To make or receive HSA contributions, individuals must meet the following qualifications:
Both the employer and employee can make contributions to the HSA within a given year, but there are certain annual limits to keep in mind.
Employers have the option to permit employees to make pre-tax salary reduction contributions to fund their HSAs, reducing the amount an employee pays in income tax. Additionally, individuals have the flexibility to roll over any unspent funds in their HSA from one plan year to the next.
Health FSAs offer employees a way to lower their income tax liability by setting aside a portion of their salary for healthcare expenses. These contributions are set at an annual limit and are made pre-tax, exempting them from income and payroll taxes.
It’s important to note that FSAs have a “use-it-or-lose-it” rule. The reduction employees select from their salary at the start of the year will need to mostly be used by year-end. To prevent overspending at the end of each plan year, the IRS allows health FSAs to have a grace period or carry-over feature.
Health FSAs follow a “uniform coverage” rule, acting like an insurance plan where the employer assumes the risk of loss. This means that the maximum reimbursement amount should be available to employees at any time during the coverage period, even if it exceeds their year-to-date contributions. This group health plan is also subject to laws such as the ACA, HIPAA and COBRA.
There is a third option known as a health reimbursement account (HRA) that offers fewer complexities; however, it is far less popular than HSAs and FSAs. This is partly because only the employer is allowed to contribute to the account. Employees may sign up, but they cannot add money.
When incorporating an HSA or FSA into your health plan, it is crucial to assess the pros and cons of each type. Remember, there is no one-size-fits-all solution for every employer.
| HSA | FSA | |
|---|---|---|
| Who owns the account? | Individual/employee | Employer |
| Who may fund the account? | Anyone can make contributions to an individual’s HSA, including employer and/or employee. | Employer and/or employee |
| What plans must be offered with the account? | A high-deductible health plan (HDHP) that satisfies minimum annual deductible and maximum annual out-of-pocket expense requirements. | Most must qualify as excepted benefits to satisfy ACA reforms. To qualify as an excepted benefit, they must meet a maximum benefit requirement and other group health plan coverage must be offered by the employer. |
| Is there an annual contribution limit? | $4,150 Individual, $8,300 Family (2024) Catch-up contributions: $1,000/year– age 55 by end of tax year | Maximum contribution of $3,200* *Projected for 2024, IRS has not finalized FSA limits at time of publication |
| Can unused funds be rolled over from year to year? | Yes | No, with two exceptions. Employees can be given a grace period of 2-1/2 months after end of plan year OR employees could carry over up to $640* (as adjusted for inflation) in unused funds to next plan year. *Projected for 2024, IRS has not finalized FSA carry-over amount at time of publication |
| What expenses are eligible for reimbursement? | Section 213(d) medical expenses, including: -COBRA premiums -QLTC premiums -Health premiums while receiving unemployment benefits -If Medicare eligible due to age, health insurance premiums except medical supplement policies Section 213(d) medical expenses, including: -COBRA premiums -QLTC premiums -Health premiums while receiving unemployment benefits -If Medicare eligible due to age, health insurance premiums except medical supplement policies | Section 213(d) medical expenses for insurance premiums are not reimbursable. The employer can define “eligible medical expenses” |
| Must claims be substantiated? | No | Yes |
| May the account reimburse non- medical expenses? | Yes, but taxed as income and 20% penalty (no penalty if distributed after death, disability or age 65) | No |
| Does the uniform coverage rules apply? | No | Yes |
Providing employees with the right medical plan that allows personalized coverage can be a difficult decision. HSAs and FSAs can ease the rising pressure of healthcare costs, but with so many complexities, rules, regulations and factors, providing the best information to your employees is essential. To understand which plan is right for you, reach out to a trusted employee benefits advisor for guidance and support.
