Comparing and Contrasting FSAs and  HSAs

Understanding FSAs and HSAs

Employers offering both flexible spending accounts (FSA) and health savings accounts (HSA) may often get questions about how these benefits work and if one is better than the other.

Benefits in Common

Both FSAs and HSAs offer employees the ability to make contributions to the accounts with pretax dollars, meaning the money is safeguarded from taxable income as well as payroll taxes. The money can be used for out-of-pocket healthcare expenses like copayments and deductibles. Other qualified medical expenses also include items and services such as prescription drugs, eyeglasses and orthodontia.

The guidelines governing each type of account do differ and usually employees are not allowed to sign-up for both types of accounts.

FSA Information

Upon enrollment of a FSA, employees choose the amount they want to contribute to the account up to a maximum of $2,600 for 2017.  Beginning January 1, the total amount the employee designates is available in the account, even though the contributions per paycheck are spread throughout the year. Employees are allowed to use the total amount in the account in the first month, if they choose.

However, employers need to clearly communicate whether employees are required to spend the complete amount in the account by March 15th of the following year or it will be forfeited; or if they are allowed to carry over $500 to the next year. This aspect of FSAs requires planning ad budgeting by employees during open enrollment so as to not lose any money in the account by year-end.

HSA Answers

In order for employees to utilize an HSA, they must choose to enroll in a high deductible health plan. According to benefit experts, at least 50% of large employers offered HDHPs as a health plan option last year. Then, employees can contribute up to $3,400 to their HSA if they have individual coverage or up to $6,750 if they have family coverage in 2017. Employees 55 and older are also allowed to make catch-up contributions of $1,000.

Employees remain the owners of the HSA even if they leave their job. It goes where they go. Funds from the HSA must be used for qualified medical expenses, if used otherwise the employee will be required to pay income tax on the withdrawal, plus a penalty if the employee is under age 65.

Additionally, many HSAs offer employees the ability to invest their contributions in a variety of funds. This aspect of HSAs is often considered a key piece for retirement savings. Future medical costs is often one of the biggest concerns noted by employees in terms of their retirement planning. More communication is needed regarding this benefit of HSAs as can be seen by the numbers below.

While HSAs continue to grow from year to year, the investment component remains small compared to overall assets. In 2016 total HSA assets were $37 billion with $5.5 billion of that being invested, according to Devenir Group, an investment adviser in the HSA industry who tracks results from 100 of the largest HSA providers. What’s promising is Devenir Group forecasts total 2017 HSA assets to grow to $44.5 billion, of which $6.9 billion will be invested.

Based of the rules of each type of account, employees may find one more favorable for their needs over the other. Both provide tax advantages and a way to cover more healthcare expenses than just what is offered by a health plan. With a little planning they can make their money work harder and go farther to keep them healthy throughout the year.

Sources:  Kiplinger’s Personal Finance. Game Plan. June 2017. P39.

Pensions & Investments. Empower to Begin Offering Health Savings Accounts. April 2017. P25.

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  1. This article assumes that all Health FSAs run on a calendar year. Not true. We generally recommend that employers run their Health FSAs to coincide with their medical plan renewal dates so that employees can adjust their annual elections based on that year’s medical-plan cost-sharing. Employees make a finding annual Health FSA election at the beginning of the Health FSA plan year that can’t be adjusted except for life events (birth, marriage, divorce, etc.), not in most cases for a change in their financial responsibility with a new medical plan. The date references to “full balance available Jan. 1” and a grace period extending “to March 15” are applicable only to Jan. 1 renewals, while the concepts of uniform coverage and a 2.5-month grace period apply to all Health FSAs, regardless of renewal date.

    Also, it should be noted that if an employee or her spouse is enrolled in a Health FSA, she can’t also open or contribute to an HSA unless the Health FSA is limited (reimbursements either [1] limited to dental or vision expenses or [2] not available until a family has incurred at least $2,600 of deductible expenses [$1,300 if the medical plan is self-only coverage]). In fact, it’s not uncommon for employees to enroll in an HSA-qualified medical plan, maximize their contributions to their HSA and also make a Limited-Purpose Health FSA election. This combination allows them to (1) maximize tax savings by reducing taxable income, (2) gain access to funds immediately for dental and vision services and (3) preserve HSA dollars for use in future years while still reimbursing dental and vision services with pre-tax dollars.