Families and Individuals with health insurance are faced with a choice that often can be confusing: Selecting between a Flexible Spending Account (FSA) or a Health Spending Account (HSA).
Although the similarities between the two choices are many, there are some differences that are important. These similarities will ensure you can maximize the benefits of the plan you choose.
Nature and purpose of both, HSAs and FSAs
Most employees who are offered health insurance are likely to have a history of medical costs in the past. Even those who are fortunate enough to be in good health realize the importance of preventive care and wellness programs, which still come at a cost in most cases.
For those who have any type of ongoing medical care needs, the burden of increasing medical costs has become taxing. Every year coverage and deductibles seem to change, and not for the better. As employees find that they need to cover more of their own expenses, finding ways to cut those costs has become a high priority.
The federal government has set up accounts that help employees with valuable tax benefits to help reduce the cost of medical expenses. These accounts are Health Spending Accounts and Flexible Spending Accounts.
Health Savings Accounts
Eligibility Requirements: A health savings account is typically the more favorable of the two. You will find, however, that HSAs are only offered in conjunction with a High Deductible Health Plan (HDHP). In 2018, a deductible of $1,350 or more for individuals or $2,700 per family is considered an HDHP and qualifies the insured to choose an HSA.
Contribution Limits: For 2018 there is a cap of $3,450 for individuals and $6,900 for families. This will go a long way towards taking care of deductibles and paying for qualified expenses not covered by insurance.
Balance Rollover: HSAs have the favorable feature that allows the unused balance for the year to roll over to the next year.
Changing Contribution Amounts: Employees can change how much they contribute to the account at any time during the year.
Portability If Changing Employers: The HSA account can follow the employee if there is a change of employment.
Effect on Taxes: Employees can choose to have contributions taken out pre-tax, or they can use the deduction when submitting their income tax returns. Account growth and distributions are tax-free.
Flexible Spending Accounts
Eligibility Requirements: None – In most cases, employers can offer FSA even if the employee declines medical coverage through the employer’s health insurance options.
Contribution Limits: The cap for 2018 is $2,650
Balance Rollover: FSAs are “Use it or lose it” plans. In most cases, the employee’s chosen yearly contribution is funded upfront. If the employee chooses to have a $2,600 FSA, the very first qualifying day, the amount is available to the employee for use, even if they have not contributed the full amount. If they use the full amount and they leave the employer before they have contributed the full amount throughout the year, the employer cannot collect from the employee post-separation. This is a risk for the employer. If on the other hand, the employee does not use the balance after they have fully contributed the amount, they lose that money, a risk for the employee.
Portability If Changing Employers: The FSA will be lost the majority of the time if there is a change of employer. FSA continuation through COBRA is the only exception.
Effect on Taxes: Contributions are taken out pre-tax and distributions are not taxed.
Both HSA and FSA funds are usually accessible through a debit card provided by the plan’s administrator. It is a good idea to keep accurate records and receipts of your expenses as occasionally an expense may be questioned. The funds have specific use purposes, and use of those funds for unqualified expenses can result in tax penalties for the employee.
Which plan is best for your needs depends on many factors. Many employees favor HSAs since they can accumulate balances over the years. Some are using these as medical IRAs, preparing for their future when medical costs are likely to be much higher.
A question that comes up occasionally when looking into HSAs or FSAs is: Can I choose both? The answer is no, unless the FSA is a “Limited Purpose FSA.”
Careful consideration of each plan’s benefits is recommended. It is highly encouraged that employees fully understand their specific plan. Consulting with your company’s HR department may answer additional questions that may not have been covered in this summary.
To learn more about HSAs and FSAs, contact the experts at BuyHealthInsurance.com at 800-793-3803. Our licensed health insurance experts will be happy to answer any questions you have.