Employer health coverage 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.
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 “everyperson” 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?
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 employer-sponsored health coverage. 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?
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.
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FSA
Employees are eligible to have FSAs, except if they have high-deductible health insurance plans (HDHPs). However, employees with HDHPs 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.
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