by Laura Woolston
on October 31, 2018
When I first began working in the Flexible Benefits industry, FSA’s (Flexible Benefit Accounts) were very popular. Employers wanted to offer FSAs to assist their employees in a tax savings program, as well as decrease their own payroll taxes. Recently, the industry has been moving more towards consumer driven health care. This change has brought a great increase in the number of HSA’s (Health Savings Accounts) that are being opened. With this change, I have often heard participants say they will open an HSA instead of the FSA, so they don’t need to worry about the “use it or lose it” policy. As this statement is true, it also reveals a great misunderstanding about the difference between an FSA and HSA.
Flexible Spending Accounts:
1. The participant can elect an amount of money, during open enrollment, that they will have as a salary reduction with each paycheck. This money is pre-tax, so it can save them up to 30% depending on their tax bracket. The IRS limit for 2018 is $2,650. Each employer, however, can stipulate what they want the maximum election to be, so long as it is the same or less than the IRS limit and is stated in the plan document. The per paycheck contributions must be the same with each paycheck.
2. The entire amount of the FSA election is available to the participant to spend on day one of the plan year. They do not need to contribute to the FSA to make that money available first.
3. Participants must spend all the elected money during the same plan year as it was contributed, or they will lose the unused money. There are exceptions like the grace period that will give them up to 75 more days to incur claims, or the up to $500 rollover that allows them to roll no more than $500 of unused money into the new plan year.
4. Once enrolled, the participant is locked into this benefit for the plan year. The only way to change the election is if the participant experiences a “life event.” A life event such as a birth, death, marriage, divorce, adoption, or loss of spouse’s job. Signing up for a HDHP with an HSA does not qualify as an event to cancel the FSA.
5. Participation is available for any full- time employee that is at least qualified to be on the employer’s group medical. They don’t need to be participants on the employers group medical.
6. A debit card for the FSA may be available if the employer allows debit cards to be issued.
Health Saving Accounts:
1. This is an actual bank account. An account is opened with a custodial bank. The participant will have a payroll deduction taken pre-tax from their paycheck and placed into this saving account. There is no election amount with each new plan year. The amounts withheld from each paycheck can differ with each payroll. Participants only need to make sure they don’t contribute more than the annual limits each year. For 2018, those limits are $3,450 for single, and $6,900 for family. Participants can contribute an extra $1,000 each year, beginning in the year they turn age 55.
2. Contributions may be invested, just like a 401K plan.
3. There is a triple savings. The payroll contributions are not taxable, the interest earned on the savings account is not taxable and the investment earnings are not taxable.
4. No contributions can be made if the participant or their spouse has an active FSA. They must wait until the end of the FSA plan year to contribute to the HSA. The FSA also must have all the elected money spent by the end of the FSA plan year.
5. Participants may only open an HSA if they are on a qualified HDHP.
6. The money is only available to spend after it has been contributed.
7. Family and/or friends may give monetary gifts towards a participant’s HSA. Those gifts would not be pretax to the family and/or friend, but the participant would be able to enjoy all the non-taxable benefits of the gift. Just be sure the gift would not over contribute the HSA account for that taxable year.
8. There is no limit as to how much money can be saved in an HSA. The only limits are on how much can be contributed in a taxable year.
9. The participant is responsible to save their receipts for claims paid out using the HSA money. If they are audited, they will need to provide the receipts to show that they spent the money on qualified services and/or products.
10. Once the participant reaches age 65, they can spend the HSA money on whatever they would like; not just on medical expenses. They would get taxed on the money they spend for non-medical services/products, but they would not be penalized. If HSA money is spent on non-taxable services/products before age 65, that money would be taxed and a penalty would also need to be paid to the IRS.
11. If the participant is on Medicare, they may not have an HSA. If they have an HSA and then move to Medicare, all contributions must end at the time they begin on Medicare. Whatever they have saved in the HSA is still available and their money to spend.
12. A debit card is always issued.
13. The HSA bank account may be moved to a different custodial bank if the participant changes jobs. The money may be transferred to the new employer’s custodial bank. Participants may also have multiple HSA accounts. They don’t need to have only one. Annual contribution limits still apply.
14. Transfers from an IRA into the HSA can be done once in the participant’s lifetime.
15. No limits on how much can be spent in a year.
16. Beneficiaries may be designated, just as a 401K. This ensures the money will be given to the person of choice upon death of the participant.
HSA accounts should not be treated as if they are FSA accounts. They are meant to be a savings account. The #1 expense for retired individuals is health care. The HSA is set up to help pay for healthcare upon retirement.
If money is tight, and medical needs high, an FSA is most likely the best option. It is available before it is contributed, giving you the plan year to pay for it.
