Many employers are changing their health benefit plans in anticipation of the employer mandate provision included in the Patient Protection and Affordable Care Act. As a result, some workers may be seeing new coverage options, some of which might include the choice to enroll in a sponsored Flexible Spending Account (FSA) or Health Savings Account (HSA). Understanding the differences between the two is critical to helping employees decide upon the best coverage option that corresponds with their unique needs.
To begin, FSAs and HSAs are both tax-advantaged accounts that allow holders to cover the cost of qualifying out-of-pocket expenses not covered by their insurance policy. This may include prescriptions, co-payments, medical equipment, eye care, treatments and fees, among other things. However, there are stark differences in who is permitted to open these accounts, the type of health coverage that corresponds with each and contribution limitations.
Employees must be enrolled in a high-deductible health plan in order to qualify for an HSA. While most of these accounts are offered by employers, workers who are enrolled in an HSA-eilgible health plan may also open one. In addition, both workers and the company that employs them are permitted to make contributions to HSAs. Similar to retirement accounts, the Internal Revenue Service outlines contribution limits each year that places a cap on how much employees and employers can fund an HSA. For 2013, individuals with self-coverage only may contribute a maximum of $3,250 - up $150 from 2012. This restriction increases to $6,450 for family coverage - up $200 from last year.
A common perk of HSAs is that any funds accrued over the course of the year will be carried over to following years and added to subsequent contributions.
These tax-advantaged spending accounts may only be established and offered by an employer and then funded by employees with pre-tax dollars. In addition, only the worker is permitted to make contributions. There also tend to be more restrictions to FSAs than HSAs in several areas. For instance, the company sponsoring the program has the discretion to set contribution limits each year, and any unused funds not used by the end of the year will be forfeited to the employer. While HSA holders are able to take their account funds with them if they leave the company or retire, those with FSAs are not allowed to do so.
Both accounts offer their own benefit and drawbacks, so comparing the two in relation their needs may help workers make a more informed decision.