FSA vs HSA: Which is Best For Your Employees?

June 11, 2017
By

Category: Benefits

FSA vs HSA

The topic of employee benefits has gone from watercooler conversation to national news, and employees are more engaged with their benefits than ever. With Open Enrollment on the horizon, your employees are already thinking about making changes—specifically: how to maximize the money they spend on medical care. Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are two ways employers can help employees use tax-free dollars to better manage the cost of healthcare. Let’s take a look at the pros and cons of FSA vs HSA to ensure you know the best option for your employees.

FSAs and HSAs reward employers and employees with tax savings. Both types of accounts are quick and cost-effective to set up, and they require no changes to employees’ use of their medical benefits. Want to know which type of account would be more helpful to your employees? Let’s consider two “every person” employees—Family Freddy and Healthy Holly—and see which account they choose. After—and with respect to the diverse workforce—we’ll compare FSA vs HSA side-by-side, so you can get a quick view of their similarities and differences.

Which employees typically get an FSA?

FSA user

Meet Freddy FSA

Freddy FSA is married with two children. He and his spouse both work full-time outside the home, and the family of four is covered under Freddy’s employee health benefits. Freddy chose a medical plan with a low deductible so that his family—which has regular and predictable healthcare needs—gets faster access to insurance benefits. To maximize his savings, Freddy also has healthcare and dependent care FSA accounts.

Since becoming a parent, Freddy accounts for every dollar he spends on healthcare. By using pre-tax money for the family’s co-payments on prescription medicine, immunizations, acupuncture and orthodontics, his healthcare FSA saves him almost 40%! Ditto on his dependent care FSA, which feels like a lifesaver when it comes to covering after-school programs and babysitting while both parents are at work. Thanks to his amazing budgeting skills, he funds his FSAs to the max—and never loses a dime after the grace period. As a bonus, Freddy’s FSA contributions lower his taxable income, which in turn also reduces the family’s tax burden.

Which employees typically get an HSA?

HSA user

Meet Holly HSA

Holly HSA is single and healthy. Her employer offers different options for medical coverage, and Holly chose the plan with the highest deductible. She pays close attention to her preventative care and knows exactly when she had her last dental checkup and annual physical. Because of her good health and high deductible plan, Holly carefully considers her healthcare spending. She prefers to invest her income in travel, yoga, and really, really good food.

But while Holly focuses on living in the present, she still keeps an eye on her future—and that’s why she enrolled in an HSA. Holly makes infrequent claims for reimbursement—her last eligible expense was an impulse buy on OTC sunglasses—so she likes that her HSA funds automatically roll over from year to year (and go with her from job to job). Holly’s employer matches her HSA contributions, so she figured: free money! As a bonus, tax-deferred HSA funds can be invested in stocks and bonds, so the money grows as she does.

FSA vs HSA: a Side-by-Side Comparison

Most likely, your workforce is not made up exclusively of Family Freddys or Healthy Hollys. So what’s a conscientious employer to do? Well, while your employees can’t enroll in an FSA and an HSA, you can offer them the choice of both options. Let’s take a closer look at the similarities and differences of these helpful accounts.

Employee Eligibility

FSA

Employees are eligible to have FSAs, except if they have HSAs. However, employees with HSAs may opt for a limited purpose FSA. LPFSAs do not offer the broad coverage of an FSA, but do cover eligible out-of-pocket dental and vision expenses.

HSA

Employees who have high-deductible health insurance plans (HDHPs) are eligible to have HSAs. Per the IRS for 2015 and 2016, to qualify as an HDHP, the plan’s deductible needs to be at least $1,300 for individuals and at least $2,600 for families.

Contribution Limit

FSA

The 2015 FSA contribution limit is $2,550. Employers may set a lower limit.

HSA

The 2015 HSA contribution limit for individuals is $3,350. For families, it’s $6,650. In 2016, the family contribution limit will increase to $6,750.

Account Ownership

FSA

FSAs stay with an employer. Employees cannot take these accounts with them when changing jobs.

HSA

HSAs are not linked to a specific employer. Employees can maintain their accounts through different jobs and into retirement.

Use it Or Lose It, or Rollover?

FSA

Use it or lose it—with two exceptions, optionally set by employers. A grace period gives employees an additional 2.5 months to incur new expenses using the previous year’s funds. At the end of this time, all unused funds are forfeited. A carryover allows employees to roll over up to $500 of unused funds into the next year. Any unused funds in excess of $500 are forfeited.

HSA

Rollover. Any money left in an HSA at the end of the year can be rolled over into the next year.

Financial Benefits

FSA

Employees fund their FSAs with pre-tax payroll deductions that lower their gross incomes and annual tax burdens. FSAs provide tax-free reimbursements for a broad base of qualifying healthcare and dependent care expenses, but money in an FSA does not grow.

HSA

Employees fund their HSAs through pre-tax payroll deductions that lower their gross incomes and annual tax burdens. Money in an HSA grows tax-deferred (funds can be invested in stocks and bonds), and reimbursements for qualified health-care expenses are also tax-free.

Changes Ahead

FSA

In an effort to help employees keep more of their funds, employers will continue to embrace the carryover option—by adding it to their FSA plans.

HSA

In 2016, the maximum out-of-pocket amount for HDHPs goes up to $6,550 (+$100) for individuals and $13,100 (+200) for families. To compensate for this increase, employers may elect to seed their employees’ HSAs.

Still got questions? Talk to a Benefits Advisor about setting up an FSA and/or an HSA today.

This article was originally published on September 10th, 2015.

About

Jeremy “Sprout” Brautman is a writer, problem solver, and big fan of growth. When he’s not trying to solve problems to help small businesses grow, he can be found developing amenities to increase occupancy at his urban Ladybug Hotel.

Category: Benefits

  • RL

    I think you should speak as well about the risks to employers for both types of plans. Aren’t employees eligible to use all funds designated in a FSA on day 1, even before it is fully funded? If they leave before the end of the year the employer cannot recoup the difference. How is this handled for HSAs?

    • It’s true: employees can access all funds designated in an FSA on Day 1, which means they could leave the company before the year is up, and the employer could not recoup the difference. HSAs work differently, and the funds are only available as accumulated.

  • Really informative. Thanks

  • You should make a printable version of this available to Zenefits customers. Great explanation on the differences!

    • Thanks for the suggestion, Brandon!

  • This was awesome information. Thank you so much.

    Would really like to take it one step further and can someone invest in both plans? What are the benefits/downfalls to such?

    • An HSA allows employees to invest their contributions in different mutual funds, similar to how a 401(k) works. Employees don’t have that option with an FSA: whatever money is contributed is what they can spend.

  • Don Gillies

    My employer says that FSA monies can be used for HSA purposes once the high-deductable is exhausted. That is missing from this writeup.

    • You can’t have an FSA and an HSA at the same time, so that’s not necessarily true. However, if you previously held an HSA and still have funds available, once the FSA runs out, you can begin to dip into your remaining HSA funds.

  • raj

    Excellent infor

  • Casey Larson

    Test comment

  • Mary Lichtenberger

    Can I use my HSA for laser eye surgery?

    • Sprout

      Yes, you can.

  • Kevin

    Can employees be enrolled in an HRA and an FSA at the same time? What about an HRA and an HSA?


You might also like