When it comes to health care and saving money, acronyms like FSA and HSA are sometimes thrown around without much explanation. However, it's important to understand the differences if you're looking to help your employees save money on healthcare expenses.
Both FSA and HSA are accounts designed to help with medical expenses, but they differ in some key ways. FSA stands for flexible spending account and is often offered by employers as an employee benefit. HSA, on the other hand, stands for health savings account and is available to those with high deductible health insurance plans.
But when it comes to HSA vs. FSA, which is better? It depends on each employee's financial and health situation. This guide will compare and contrast the two accounts regarding eligibility, funding, contribution limits, and other factors to help you find the right one to offer your employees.
What is an HSA?
HSA stands for health savings account. It's an account that allows employees to enjoy tax benefits as they save for medical expenses. These accounts are only available to those with high-deductible health plans, but they offer several benefits that make them a popular choice for many people.
When you contribute money to an HSA, those funds are not subject to federal taxes and, in most cases, state taxes as well. This means that you can save money on taxes while also building up a reserve of cash to pay for different medical expenses.
One of the most significant benefits of an HSA is that the money can be used for a wide range of medical expenses, including doctor visits, prescription medications, and even certain elective procedures.
Additionally, you can roll over any money you don't use in a given year (which is not the case with an FSA, but more on that in a bit). This makes an HSA a great choice for those who want to reserve funds for future healthcare needs.
Overall, an HSA can be a smart choice for many people, offering tax benefits and flexibility that other accounts don't. If your employees will have to participate in a high-deductible health plan, it's definitely worth considering offering an HSA alongside that.
HSA Pros and Cons
Due to the rising costs of health care expenses, more companies are beginning to offer HSAs. While that's great, it's important to understand the advantages and disadvantages of an HSA before deciding if it's the right fit for you or your company.
Advantages of an HSA
One of the biggest advantages of an HSA account is that it provides significant tax savings. Employees can deduct contributions to a health savings account.
Plus, earnings, interests, and withdrawals are tax-free, making it a powerful tax-saving tool for most employees.
Another benefit of HSA accounts is the flexibility they offer. Account holders can use their funds for medical expenses not covered by insurance, including dental, vision, and even alternative medical treatments. There are also no "use it or lose it" policies so leftover money can be rolled over into the next year.
And finally, an HSA account can also serve as a long-term savings vehicle. While immediate medical needs are the primary reason for using an HSA, account holders can invest their funds in mutual funds and other investment vehicles to grow their money over time. This allows individuals to save for future healthcare expenses and even use HSA funds for retirement after age 65.
Disadvantages of an HSA
One of the biggest drawbacks of HSA accounts is the requirement of a high-deductible health plan. This means individuals are responsible for a significant portion of their healthcare costs before insurance kicks in.
While HDHPs can help lower monthly premiums, they can be financially challenging for some individuals. This is especially true for those with significant medical needs.
Another important element to consider is the contribution limits of HSA accounts. In 2023, individuals can only contribute up to $3,850 (or up to $7,750 for family coverage). While this may seem like a large amount, it may not be enough to cover significant medical expenses for some families.
Additionally, not everyone is eligible to open or contribute to an HSA account. This means individuals enrolled in Medicare are not eligible to contribute to an HSA, limiting access to this important account type for some vulnerable populations.
What is an FSA?
It's similar to an HSA! By contributing to an FSA, employees can save money on taxes because the contributions are deducted before taxes are taken out of their paychecks.
An FSA can be used for things like:
We'll dive into the pros and cons below, but one of the main benefits of an FSA is that it can lower an employee's taxable income, as mentioned above. This is true of similar health savings or spending accounts, but it's worth mentioning here again as it's a big feature for most companies offering FSAs to employees.
For example, if employees earn $50,000 annually and contribute $2,500 to an FSA, their taxable income would decrease to $47,500. This can result in significant tax savings for employees.
FSA Pros and Cons
An HSA is more advantageous for employees who are healthy and interested in growing their contributions and interests over the long term. Ultimately, the right choice for your organization comes down to your unique needs and culture. Here are a few pros and cons to help you determine if they do meet those needs.
Advantages of an FSA
Aside from the tax benefits, one of the biggest advantages of an FSA is that it's easy to use. Employees don't need to fill out a lot of paperwork or jump through a lot of hoops. They simply swipe their FSA card or provide their account information when they receive medical care or purchase eligible medical products.
Speaking of paying for medical care, it's helpful to know that all contributions are immediately available to the employee at the start of the plan year, even if the full amount hasn't been contributed yet. This feature is helpful for employees with immediate healthcare needs.
And finally, compared to an HSA, which has a year-round open enrollment period, an FSA has a short enrollment window. This can be viewed as a "pro" because it encourages employees to be proactive about their healthcare costs.
Disadvantages of an FSA
One of the biggest disadvantages of an FSA is the "use-it-or-lose-it" nature of the account. Unfortunately, if you don't use funds by the end of the year, you lose them. Some plans offer grace periods and (more sparingly) rollover options, but still, it's not ideal for most people, especially if they're young and healthy.
Another disadvantage of an FSA is that there are limits on how much you can contribute each year. In 2023, the maximum contribution limit for an FSA is $3,050 (up from $2,750 in 2021, so that's positive news). As with an HSA, while this amount can still help cover medical expenses, it may not be enough for individuals with significant medical needs.
Finally, some employers may restrict how you can use your FSA funds. For example, some plans may require you to obtain a doctor's prescription for certain over-the-counter medications to be eligible for reimbursement. Others may not cover certain types of medical expenses at all.
While this is a drawback for employees, it's something you can look into as an HR professional designing employee benefits packages. Consider how they would get the most (and best) use out of an FSA to help make them more beneficial.
HSA vs. FSA: Which Is Better?
So, when it comes to HSA vs. FSA, which is better? If your employees have qualifying high-deductible health plans, an HSA might be the way to go. HSAs allow for tax-free contributions, tax-free withdrawals for medical expenses, and the ability to roll over unused funds yearly.
An FSA could be a better option if your employees have more predictable healthcare costs. FSAs also offer tax-free contributions, but the funds must be used within a certain time frame and cannot be rolled over.
Ultimately, the decision comes down to your employees' healthcare needs and spending habits. If you're unsure which is better, consider offering both! You are not required to offer either (check out our compliance guide for more information), but you can offer both an HSA and a health FSA.
Employees opting for a general FSA could be disqualified from having an HSA, but a limited-purpose or post-deductible FSA may still make them eligible. Ultimately, employees will need to choose which option works best for them, but having the ability to offer both could greatly benefit your company.
Manage Benefits With GoCo
The HSA vs. FSA debate is only one factor HR professionals must consider when managing employee benefits. However, what's clear is that managing employee benefits effectively is crucial to the success of your business.
That's what GoCo is for.
With our industry-leading technology, you can offer quality benefits efficiently, all while improving the healthcare decision-making process for your employees. Schedule a demo of GoCo today and take the first step in upgrading your company's benefits administration.