FSA vs HSA – Which One Should You Choose?
With open enrollment approaching, you may be grappling with a decision: should you offer a Flexible Spending Account (FSA) or a Health Savings Account (HSA)?
Both FSAs and HSAs reward employers and employees with tax savings. These accounts are usually cost-effective, easy to set up and require no changes to employees’ use of their medical benefits.
But when it comes to deciding which one will be the right fit for your organization, it’s important to fully understand the benefits and limitations of the programs you’re offering and compare them with the varied needs and expectations of your employees.
Let’s examine the different features of each plan and what they have to offer your employees.
What’s an FSA?
An FSA is an account that employees put money into to be used for certain out-of-pocket health or dependent care expenses.
What’s the benefit of putting this money aside? Employees don’t have to pay taxes on it, which means they’ll save an amount equal to the taxes they would have paid on that money. Plus, this money can cover not just their medical expenses but also the expenses of their spouse and dependents. Depending on their tax bracket, they may save up to 30% or more in taxes.
There are two types of FSAs:
- Health Care FSA:A health care FSA covers out-of-pocket expenses, including medical, dental or vision expenses. Many over the counter drugs, such as cold and allergy medicines, pain relievers and antacids, can also be reimbursed through an FSA.
- Dependent Care FSA: Also known as a Dependent Care Assistance Program (DCAP), a Dependent Care FSA covers employment-related expenses for childcare. To qualify, funds must be used for services that allow employees to go to work.
To access this fund, employees can choose to use a payment debit card to pay on-the-spot, or they can pay out-of-pocket and submit a claim to the FSA (through their employer.) Once they submit a claim with proof of the medical expense and a statement that it hasn’t been covered by their plan, they will then receive reimbursement for their costs.
What’s an HSA?
An HSA is a tax-advantaged savings account that’s created to help employees pay out-of-pocket for medical expenses.
A smart way to pay for medical expenses, HSAs are now also popular additions to retirement planning. Many people have started adding money to HSAs for a non-medical retirement fund because of the benefits they offer, how the funds automatically rollover and how the same HSA can be transferred between jobs.
But there are strict rules about who is allowed to open and contribute to an HSA, and how that money can be spent. If these rules are ignored, employees could lose the tax advantages and owe additional fines.
Which one should you choose?
So now that we’ve defined the difference between an FSA and HSA, let’s compare the two and the different benefits they offer:
FSAs are very helpful if employees have regular, predictable healthcare needs and expenses. Thanks to a low deductible, employees will be able to access their insurance benefits sooner. But, if they’re in good health without frequent expenses or dependents, an HSA’s high deductible plan may be a better fit.
An FSA account is funded with pre-tax payroll deductions from an employee’s paycheck. This helps lower their taxes by lowering their overall taxable income, but the money in that account does not grow past the initial amount. An HSA is also funded with pre-tax payroll deductions, but money in an HSA grows and can be invested in stocks and bonds. Reimbursements for qualified health-care expenses are also tax-free.
Employees are eligible to have FSAs only when they don’t also have an HSA account. But, those with an HSA may have a limited purpose FSA. These don’t offer all of the same benefits of a normal FSA, but they do cover eligible out-of-pocket dental and vision expenses.
If employees have a HDHP, they’re able to have an HSA. For 2019, the minimum annual deductible is $1,350 for individual coverage and $2,700 for family coverage.
The 2019 FSA contribution limit is $2,700, but an employer could set a lower limit. For an HSA, employees can contribute up to $3,500 to an HSA if they have single coverage or up to $7,000 for family coverage in 2019.
An FSA stays with an employer and cannot be transferred to other jobs, whereas an HSA account is not linked to a specific employer.
Unfortunately, FSAs funds do not roll over, unless an employer allows a grace period of an additional 2.5 months or a carry-over up to $500 of unused funds. HSA account funds roll over into the next year.
What’s Best For Your Employees
Deciding which health benefits plan will work for your employees depends on the lifestyle they lead and what they’re looking to gain. FSAs help them gain quick access to their benefits, while HSAs can double as a retirement account to help them plan for the future. Whichever one they’re interested in, it’s important that you as an employer are well versed in the different benefits and can help give advice on their decision.
Looking for more information on FSAs? IPMG can help! Here’s our handy guide on how FSAs can boost recruitment by adding value to your employee benefits package.