What’s The Difference Between HSA and FSA?

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Looking to add a little something special to your benefits package? Savings accounts are a popular choice since they are beneficial to your business and your employees. We’re going to look at the difference between HSAs and FSAs to help you figure out what’s going to fit your needs.

Both accounts allow employees with health insurance to set aside money for healthcare expenses including deductibles, copayments and coinsurance, and prescription costs. Generally, your employees will receive a debit card for the account which they will use to pay for eligible expenses throughout the year.

Health Savings Accounts and Flexible Spending Accounts both have large benefits when it comes to managing your out-of-pocket medical expenses and minimizing your tax liability.

Want to know which option is best for your employees? Let’s look at the difference between HSA and FSA accounts.

Health Savings Accounts

One of the key differences when comparing HSAs to FSAs is that not all of your employees will be eligible for the HSA. Only employees who have high-deductible health plans, or HDHPs, can select the Health Savings Account.Pink piggy bank with coins underneath it.

HDHPs are defined as health insurance with high deductibles. In 2019, the IRS minimum deductible is $1,350 for individual coverage and $2,700 or more for family coverage. The HDHPs individual out-of-pocket limit can be no more than $6,750 and $13,500 for family.

Small and large businesses are leaning toward exclusively offering HDHPs to their employees. The HDHP helps employers contain healthcare costs by shifting the majority of the cost to employees through higher copays.

Transamerica says, “As individuals struggle to adjust to this new trend, tax-advantaged plans, such as Health Savings Accounts (HSA) and Flex Spending Arrangements (FSA), can help workers stash pre-tax dollars away specifically to cover those new costs.”

To qualify for and use an HSA, employees must:

  • Only have the HDHP health insurance plan.
  • Not be eligible for and participate in Medicare.
  • Not be claimed as a dependent on someone else’s tax return.

If your employees do qualify for the HSA, there are a few benefits to this savings plan you should know about.

  1. There is no deadline for withdrawal with Health Savings Accounts. Employees contributions will carry forward year-by-year and go with them even into their retirement years.
  2. 3-way tax savings: Contributions going into the HSA, growth earnings while in the HSA, and HSA dollars used to pay for qualified health expenses are all federally tax-free. These tax savings help lessen the tax burden for your payroll as well as provide more cash-flow to the employee.
  3. Your employees will enjoy the ability to use the HSA as an investment tool for potential savings and investment growth.

HSA 2019 Contribution Limits

The maximum annual contributions allowed are:

  • Individuals: $3,500
  • Family Coverage: $7,000

There are a few solid benefits to the Health Savings Account, but the best fit will depend on your employee’s needs. Which depending on how many employees you have, could vary. Let’s take a look at the many advantages a Flexible Spending Account brings to the table.

Flexible Spending Accounts

Flexible Spending Accounts, also known as flex spending arrangements, are more commonly offered with traditional medical plans.

Health FSAs may be offered if you also offer an ACA qualified health plan to your employees.

With an FSA, employees contribute pre-tax dollars to pay for out-of-pocket healthcare expenses like deductibles, copayments, and other qualified medical, dental, or vision expenses not covered by their health insurance plan.

Interested in the FSA for Dependent Care? Check out our recent article: What Are Flexible Spending Accounts? The Complete Employer’s Guide

Calculator with coins stacked up next to it and title

The IRS announced that the 2019 FSA Health pre-tax deduction limit would increase to $2,700 for the individual.

FSA Carryover Rule

The U.S. Treasury Department issued new rules stating employers could now offer employees a $500 carryover for funds remaining in their FSAs at year end. That is, if you don’t offer a grace period to your employees. You cannot offer an FSA carryover provision and an FSA grace period at the same time.

The use-it-or-lose-it rule means any remaining funds at the end of the year, or grace period, are forfeited back to your business.

Similar to the HSA, Flex Spending Account contributions are made pre-tax, and distributions are untaxed. This is beneficial to your business and your employee’s take home pay as it lessens taxable income and those funds are not subject for FICA (social security and Medicare) or FUTA (federal unemployment) taxes.

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