HSA vs. FSA: An Expert Explains the Difference Between Health Savings and Flex Spending Accounts
During open enrollment periods, I am usually asked a number of times by our clients’ employees, “Which would be better for me, an HSA or an FSA?” What the employee is referring to is an option between enrolling in a health savings account (HSA) or a flexible spending account (FSA). The pre-tax dollars deposited into these accounts can then be used to pay healthcare costs for medical, dental and vision expenses.
The IRS restricts what expenses can be paid for using an HSA or FSA. A list of eligible expenses can be found here. While both programs are great ways to take advantage of tax savings, they differ in ways that benefit the user, depending on their situation.
Health savings accounts explained
An HSA is a special tax-advantaged bank account that allows employees to save pre-tax dollars through payroll deductions. This bank account is then used to pay for the out-of-pocket healthcare costs for the employee and their dependents. HSA account funds do not have to be used in the plan year in which they were deposited. The funds roll over from year to year, allowing you to save for future needs as they come up. Some programs even allow you to earn interest on your health savings dollars.
It’s important to note that before an employee can open or contribute to an HSA account, they must first be enrolled in a high-deductible health plan.
Some employers contribute to their employees’ HSA funds with either upfront or monthly deposits. The annual contribution limits for HSA deposits (including employee and company contributions) for 2018 are:
- $3,450 for an individual
- $6,850 for a family
The IRS has also included a “catch up” contribution provision, which permits participants ages 55 and older to contribute up to an additional $1,000 towards their HSA.
Flexible spending accounts explained
An FSA allows for a person to set aside pre-tax dollars from their paycheck to pay for their eligible out-of-pocket healthcare expenses. The deductions are distributed evenly over the course of the benefit plan year and the elected amount is available to the employee on the first day of their benefit plan year. So, basically, the employee receives an interest-free loan, which is then paid back over time with pre-tax dollars.
Similar to HSAs, the IRS sets contribution limits--up to $2,650 for 2018--and also places restrictions on what can and cannot be paid for with these funds. With an FSA, however, there is no requirement for the employee to be enrolled in a high-deductible health plan in order to contribute to an FSA. Many FSAs also include a debit card that can be used to make eligible purchases.
FSAs are known as “use-it-or-lose-it” plans. This means that employees have the benefit plan year to use their FSA election amount. Any remaining balance at the end of the benefit plan year is forfeited. However, with the Affordable Care Act (ACA)’s granting of an additional grace period to use FSA dollars, it becomes more difficult to lose the funds. The grace period allows employees to have an additional two and-a-half months to incur eligible expenses and permits the employee to be reimbursed from their previous plan years’ remaining funds.
Should you choose an HSA or FSA?
Although every employee has different healthcare needs, here are some potential reasons to choose one program over the other:
- If you know you are going to have a costly medical procedure relatively soon, whether it is having a baby, gall bladder removal or three crowns put on your teeth, you might opt for an FSA. This is because the funds are immediately available to you with the FSA. However, the HSA funds are only available as your account balance builds.
- If you are unsure of your healthcare needs for the coming benefit plan year, the HSA method might suit you better. Remember, we mentioned that FSAs have that use-it-or-lose-it clause, which means that you could potentially pay back funds that you did not use during the benefit plan year.
- If you are very healthy with minimal healthcare costs throughout the year, choosing a high-deductible health plan will most likely save you premium dollars. In this case, you might decide it makes sense to put the money you’re saving every month into a health savings account to use for any expenses that do come your way.
How about having an HSA and a limited-use FSA?
Employees enrolled in high-deductible health plans have the option of enrolling in both an HSA and a limited-use FSA.
If an employee chooses to enroll in a limited-use FSA, the FSA funds can only be used for eligible dental and vision expenses, such as eye exams and glasses. This is a great option if you have immediate needs for dental and vision services but have not yet built up the balance to pay for those expenses through your HSA account.
Regardless of which program you decide on, by contributing to either an HSA or FSA, you will be taking advantage of additional tax savings that you would not have received had you paid for these expenses out of pocket.
This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.
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