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FSAs and HSAs: Know the Differences

 

Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are tax-favored health plans that enable people to save money to pay for medically related expenses.

Both FSAs and HSAs operate like a personal savings account. However, the money in these accounts can only be used for eligible medical expenses — such as copays, deductibles, prescriptions and certain medical equipment. Contributions to both plans are not subject to federal — or typically state — payroll taxes, resulting in tax savings for plan sponsors and participants.

Employers can generally offer an FSA and an HSA, but employees cannot enroll in the two simultaneously. They must select one. Also, employers do not have to contribute to an FSA or HSA, but they can if they want to.

Below are some differences between the two plans, including eligibility requirements, contribution limits, account ownership and rollover options.

Eligibility requirements

FSA

Must be established by an employer. Contributions cannot be made otherwise. Employees can enroll in the plan, regardless of whether they have a High Deductible Health Plan (HDHP) or not.

HSA

Can be established by an employer or an individual, including a self-employed person. Must be offered in conjunction with an HDHP. In other words, employees who opt for an HSA must also have an HDHP.

Employees with an HSA cannot concurrently contribute to an FSA, but they can have a Limited-Purpose FSA (LPFSA) and an HSA at the same time. An LPFSA lacks the broad coverage of an FSA and can only be used for qualified dental and vision expenses.

Contribution limits

FSA: For 2019, the annual employer + employee contribution limit is $2,700.

HSA: For 2019, the annual employer + employee contribution limit is $3,500 for self-only coverage and $7,000 for family coverage.

Account ownership

FSA: The employer owns the plan. If a plan participant changes jobs, he or she cannot take the account with him or her. Unused funds left over at the end of the year belong to the employer, not the employee.

HSA: The account stays with the employee, even if it was established by the employer. Therefore, if a plan participant leaves your company, the HSA goes with him or her.

Rollover options

FSA

Subject to the "use it or lose it" rule — meaning account holders must spend their funds by the end of the plan year or risk losing the money. Note that the FSA regulation allows plan sponsors to provide one of the following two methods of relief to FSA users:

  1. A grace period of 2.5 months after the end of the plan year, during which the funds can be used for qualified medical expenses. Once the grace period ends, any remaining funds belong to the employer.
  2. A carryover that lets the user roll over up to $500 of unused money into the next plan year. Amounts over $500 are forfeited.

HSA

Any funds left in an account at the end of the plan year are rolled over into the next year.

Are you considering offering an FSA or HSA? If so, speak with an employee benefits expert who can help you choose the right plan(s) for your business.

 

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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