Health savings accounts (HSAs) and flexible spending accounts (FSAs) give people with health insurance a way to consistently put money away for health care costs, including deductibles, coinsurance, copayments, and prescriptions. These are also known as “qualified medical expenses.”
An HSA is not the same as a regular savings account. Only people who have a high-deductible health insurance plan (HDHP) can open an HSA. The benefit of doing so is that yearly contributions are tax-deductible, and funds in an HSA can be invested—meaning that your money can grow tax-free.
An FSA is what employers offer to employees in a benefits package. Flexible spending accounts provide employees leeway in choosing insurance coverage and typically follow a “use or lose” rule. When funds are leftover in an FSA, unspent money cannot roll over to the next year. Usually, FSAs are funded by regular contributions taken out of an employees’ paycheck.
Differences between HSA and FSA
As an employer, both HSAs and FSAs have valuable healthcare-related benefits for your employees. So, what is the difference between HSA and FSA for you and your employees? Among others, these accounts have different effects on taxes, eligibility requirements, and contribution limits that impact how your employees benefit most. Let’s take a closer look.
- Contribution limit
A health savings account has a higher contribution limits, for 2020 the limits are: $3,550 for individual coverage and $7,100 for family coverage and for 2021 they have been increased to $3600 for individuals and $7200 for families. There is also a $1000 catch up contribution that is allowed for those aged 55 +. Flexible spending accounts do not have the option to double contributions for families and have a lower contribution limit of $2,750.
- Effect on taxes
With HSAs, contributions are tax-deductible or can be taken out of pay pretax. Distributions and growth from health savings accounts are tax-free. With FSAs, contributions are pretax; distributions, on the other hand, are untaxed.
- Eligibility requirements
FSAs are solely offered by employers. Thus, eligibility for an FSA depends on whether a business provides this benefit to its employees. An HSA requires an active high-deductible health plan to be eligible.
- Adjusting contribution amounts
Flexible spending accounts only allow for adjustments to contribution amounts during the open enrollment period or in the event of a change in family status or employment. HSAs allow contribution amount adjustments at any time.
With a health savings account, unused balances roll over into the new fiscal year. FSAs do not—capping rollover at $500, and beyond that, the unused credit is forfeited.
With an HSA, a change of employment doesn’t affect the account as long as the HDHP remains current. With an FSA, a shift in employment typically means account loss. However, through COBRA, some employees can be eligible for FSA continuation.
- Withdrawal Rules
With an FSA, only eligible healthcare expenses can be paid for with account funds. With an HSA, non-qualified withdrawals can be made, but they are taxed as income and come with a 20% penalty for individuals younger than 65.
How to Choose Between an HSA or FSA
When weighing both options, consider that an HSA is only of any value to employees if they have a high deductible health plan. If the insurance you provide or are enrolled in does not qualify as an HDHP, then the HSA loses its purpose.
If your insurance plan does qualify as an HDHP, then an HSA maybe a better choice out of the two.
Learn More About Insurance Plans with DesignTM Health
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