HSA vs FSA: Everything You Need to Know
When it comes to HSA vs. FSA, both Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) plans help employees and employers with tax savings.5 min read
HSA vs. FSA: Everything You Need to Know
When it comes to HSA vs. FSA, both Flexible Spending Account (FSA) and Health Savings Account (HSA) plans help employees and employers with tax savings. Neither type of account is difficult to set up, and they do not require any kind of change to the medical benefits of employees.
Both HSA and FSA accounts can be used for qualifying purchases, which are generally medical costs. These accounts are kind of like a savings account that is usable only for specific types of expenses. When either type of account is set up, the employee chooses how much they wish to add to their account each payday. The money is added to their account pre-tax.
Employers are not required to offer a contribution to an employee's HSA or FSA, but many companies do offer this as an additional benefit. Plus, employers can choose to offer one or both types of accounts, depending on the type of insurance they offer.
- HSA accounts are available only for employees who have a high deductible health plan (HDHP).
- Employees can put up to $3,400 for self-coverage or $6,750 for family coverage into an HSA as of 2017.
- Employees age 55 or older can contribute up to an additional $1000 to their HSA per year.
- The HSA is an account owned by the individual, not the company.
- Employees can access only the funds that have already been added to the account.
- Money added to an HSA does not expire at the end of the year.
- You must keep records and report your HSA on your taxes, through Form 8889, Health Savings Account.
- Employees can change the amount added to their HSA any time throughout the year.
- The HSA belongs to the employee, and can therefore go with them when they change employment.
- Funds are added to an HSA through pre-tax deductions. This lowers gross income and tax burdens.
- HSA money grows tax-deferred, allowing it to be invested.
- Reimbursements for qualifying expenses are tax free.
- Employers do not have to offer a contribution to an FSA, but many do as an extra employment benefit.
- FSA plans must be established through the employer.
- An employee can open an FSA even if they do not have a high deductible health plan.
- Employees can contribute up to $2,600 per year to their FSA, as of 2017.
- Employees 55 years of age or older can put up to an additional $1,000 in their FSA each year.
- Employers own the FSA.
- Employees can change the amount they contribute any time of the year if a family status change happens.
- The amount contributed must be chosen at the beginning of the year or open enrollment period.
- FSA Forfeiture allows employers to keep any funds not used at the end of the year.
- FSA Carryover allows employees to keep up to $500 of the money contributed for the next year.
- To receive FSA money, an employee needs to provide a written statement from a third party that includes the expense and how much it is. This also needs to include that the charge isn't covered by another plan.
- Generally, FSA funds do not carry over when an employee leaves the company unless the employee is eligible for FSA through COBRA.
- Money added to an FSA account are pre-tax.
- Distribution amounts from an FSA are not taxed.
What Can Contributions Be Used For?
Money added to an FSA or HSA can be used only for specific medical or dependent care costs. The money is usable for the employee, their dependents, and their spouse. The following types of expenses may be covered:
- Hospital bills
- Visits to a primary care physician
- Dental expenses
- Prescription medications
- Medical equipment
You can find a full list of expenses that are eligible and ineligible through the IRS's Publication 502, Medical and Dental Expenses.
What Are the Advantages of HSA and FSA Plans?
Employees and employers benefit from both HSA and FSA plans. Employees get the benefit of tax reduction. If an employee contributes $1,000 to either account, their taxable income drops by $1,000.
Employers decrease their tax liability. It's important to remember that employers need to make a contribution for FICA tax.
Up to 75 percent of employees consider their health benefits, including FSA and HSA plans, before taking a new job. FSA and HSA plans increase employee satisfaction.
What Are HSA Eligibility Requirements?
It's important to remember that only those with a high deductible health plan can get an HSA. As of 2015, this type of health plan has a deductible of at least $1,300 for a single person or $2,600 for a family. The high deductible health plan must be the employee's only insurance plan. In addition, employees cannot be eligible for Medicare or be claimed as a dependent on another person's taxes.
How to Choose Between HSA and FSA
Making the choice between an HSA and FSA plan needs to happen during open enrollment periods or during life event periods.
FSA plans are the most common option used by employers throughout the country. Unless an employer offers a limited-purpose FSA, employees cannot have both types of plans. Limited-purpose FSA plans cover only dental and vision costs.
It's important to remember that there is not an equivalent plan type for those who are self-employed or for those who don't have the option of either through their employer.
Employees should make sure to do the math on their medical expenses to decide on the best plan for their individual or family needs.
Benefits of FSA
- Saves employees money by decreasing their taxable income
- Can be used for medical and health expenses
- Pre-loaded at the beginning of the year
- Allows employees to pay medical expenses they accrue, even when they don't have cash on hand
Drawbacks of FSA
- The money is not meant to be held on to; it should be spent
- Money does not roll over
- Requires meticulous estimation of contributions
- Does not transfer to a different job
Benefits of HSA
- Powerful investment account
- Employees don't pay taxes on contributions
- Save funds to use another year
- Can be invested like an IRA or 401(k)
- Investment grows tax-free
Drawbacks of HSA
- Available only for those with high deductible health plans
- Deductibles must be at least $1,300 per year for individuals or $2,600 for families
- Out-of-pocket expenses on high deductible plans may be high, making this a less desirable option for many
If you need help with HSA or FSA plans, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.