UPDATED: April 12, 2018 – Employee healthcare insurance has made national news with the increased use of HSA (Health Savings Account) and FSA (Flexible Spending Account) plans. These programs help employees have more control over their healthcare benefits than in the past and employees want them to maximize their benefits and minimize their medical out of pocket costs.
An HSA and FSA are designed for employers to help their employees use tax-free spending to cover healthcare expenses. Though these accounts have some similarities, it is important to understand what makes them different when choosing between them.
Health Savings Accounts
HSA plans are designed to help the employee pay for future medical expenses and are connected with a high deductible health plan. The high deductible plan is inexpensive for the employer, so the employer often contributes to the HSA along with the employee. The employee’s contribution is tax-deferred, which means it will not be taxed.
If you opt for the HSA, you will use the funds for health-related expenses not covered by the plan, such as copayments, emergency care, chiropractic, prescriptions, and other qualified medical expenses.
Typically, the employee choosing the HSA is a single individual or a family with no ongoing medical problems and infrequently makes medical claims. One benefit of the HSA is that at the end of the year, the leftover funds role over to the next year. An added advantage is that it belongs to the employee, and it can move from employer to employer.
Flexible Spending Accounts
FSA plans are designed to help employees set aside money to help pay for their out-of-pocket healthcare expenses with money deducted before taxes. The employee that uses an FSA is typically one that chooses the more traditional coverage, has a family, and/or ongoing medical care, such as someone with diabetes. This is the plan you want if you make claims throughout the year.
The greatest benefit of this account is that it is pre-taxed money, set aside to pay for medical expenses like prescriptions, copayments, acupuncture, orthodontics, and other costs not covered by the plan. If you plan your expenses right, you will spend all the money in the account by the end of the year.
The downside of an FSA is that your money will not carry over to the next year. There are two exceptions: 1) $500 can be carried over to the next year and 2) there is a 2.5 month grace period into the new year to spend the money. Any funds left will be lost. The account stays with the employer and will not follow you to a new job.
Advantage of High Deductible Insurance
HSA’s go along with the high deductible insurance plan, which is designed to provide coverage for catastrophic events. It’s a good option if you are struggling to find an affordable plan. This means you will have have lower premiums and higher deductibles than standard plans, which is where the HSAs come in to help out. The longer you have the account without much use, the more money you can have to help pay deductibles and medically related items when needed.
The Limitations to Contributions
The IRS set the limit for contributions to the HSAs and FSAs. The limits for 2016: The maximum contribution to an HSA is $3,450 for an individual and $6,900 for families. Keep in mind this is the account the employee owns and the funds will carry over to the next year. The maximum contribution to an FSA is $2,550, and only $500 can be carried over to the next year.
Effects of HSA and FSA to the Insurance Marketplace
As employees are becoming more active in their health plans and better managing their HSA and FSA funds, more people are moving toward these accounts. The projection is that 50 million Americans will be using HSAs or FSAs by 2019. For FSAs, there are projections that the “use it or lose it” rule may be amended in the near future.