Healthcare is becoming increasingly difficult for the average employee to afford. Out-of-pocket spending on medical services increased by 10.4% in 2021, making individual households the second-biggest spender on care.
As costs rise, people can’t get the care they need. In a recent Kaiser Family Foundation poll, nearly half of U.S. adults reported struggling with healthcare costs. Among insured people under age 65, 47% have difficulty affording care. In addition, approximately 43% reported delaying care because of costs.
Employers can help by offering their employees a flexible spending account (FSA) or health savings account (HSA). These financial tools make it easier to afford healthcare costs insurance doesn’t cover.
What Is a Flexible Spending Account?
A flexible spending account, more commonly called an FSA, is an account employees can use to save for medical expenses. Account holders can draw on their FSA funds to pay for non-covered healthcare costs, including:
- Copayments and coinsurance
- Dental care
- Vision care
- Elective procedures
- Uncovered services
Companies offer FSAs as part of employee benefits packages, typically in addition to a traditional insurance plan.
How Does an FSA Work?
Employees fund their FSAs through voluntary payroll deductions. First, the employee chooses how much to contribute for the year; then, payroll administrators divide that amount into equal deductions.
FSA contributions are tax-free. The account owner still pays their healthcare costs, but they save the amount they would have paid in tax on that income.
Employers may contribute to employee FSAs as an additional perk, but it’s not a requirement. Many employers offer FSAs with employee-only contributions.
How Do Employees Use FSAs?
To use FSA funds, an employee submits a claim through their company with proof of the out-of-pocket expense. The company then offers reimbursement from the employee’s FSA.
Employees may use FSA funds to pay medical expenses even if they haven’t made the deposit yet, provided the annual contribution will be sufficient. Future contributions reimburse the company for the advance payment.
For example, suppose an employee’s annual contribution is $3,000, and they’ve deposited $500. They need $1,000 to cover major dental care. You can reimburse the expense and use the employee’s future deposits to cover the cost.
What Types of FSAs Are There?
There are three basic types of FSAs:
- Health Care FSA (HCFSA): The standard FSA type, used for most expenses insurance won’t cover
- Dependent Care FSA (DCFSA): An FSA that employees can use to pay for dependent care services, such as childcare or day services for adults with disabilities
- Limited-Expense Health Care FSA (LEX HCFSA): An FSA that employees can use for medical and vision expenses only; the only FSA that employees can use alongside a health savings account
You can offer as many or as few of these FSA types as you choose. You can set up an FSA in-house, but because corresponding laws and limitations change often, it’s easier and smarter to use a third-party administrator.
What Is a Health Savings Account?
Like an FSA, a health savings account (HSA) is a tax-free account used to pay for medical expenses. But unlike an FSA, it’s available exclusively to individuals with high-deductible health plans.
A high-deductible health plan (HDHP) has a lower premium than a standard plan but a higher deductible. The deductible is the amount an employee pays out-of-pocket before the employer starts paying their share. An HSA can make those pre-deductible payments — and other healthcare costs — more affordable for an HDHP subscriber.
The HSA belongs to the employee and stays with them if they leave their position. Also, unlike an FSA, an HSA belongs to the employee even if they leave their job. Self-employed individuals and contractors can sign up for HSAs outside of an employee-employer relationship.
FSA vs. HSA: Key Differences
FSAs and HSAs can lower your employees’ out-of-pocket costs of health insurance. But which is best for your teams and your organization? Here are the differences to know about before you decide.
Both FSAs and HSAs limit who can enroll. FSAs limit enrollment to those with employer-sponsored insurance, while HSAs are only available to those with high-deductible plans.
An FSA is available to any employee with an employer-sponsored health plan. If you have team members with other insurance, such as Marketplace plans or Medicare, they won’t be eligible to enroll. Contractors are also ineligible.
An HSA is available to individuals with a high-deductible health plan and no other health coverage, except for plans that apply exclusively to:
- Accidents or disability
- Dental or vision care
- Long-term care
- Remote care
- Liabilities, such as workers’ comp
- A specific condition, such as cancer
- A fixed amount of coverage for inpatient hospital care
For the government to consider a plan high-deductible, the plan must have a minimum annual deductible of $1,400 for an individual or $2,800 for a family. This applies to the 2022 tax year. Those limits will increase to $1,500 for self-only and $3,000 for families in 2023.
Someone with an HSA can’t also have a health care or dependent care FSA, but it is possible to have a standard FSA and an HSA.
Enrollment and Changes to Account Contributions
HSAs are significantly more flexible than FSAs. HSA funds carry over year-to-year, and employees can change their contributions at any point. FSA contributions and enrollment stay the same for a full enrollment year.
Eligible employees can enroll in an FSA or make changes to their contributions during the company’s open enrollment period. Changes are also allowed if the employee experiences a significant life event. The IRS maintains an active list of permitted events, which include changes in the following:
- Marital status (e.g., wedding, divorce, or spouse death)
- Number of dependents (birth, adoption, or a child’s death)
- Dependent status (e.g., an adult child loses dependent status)
- Medicare eligibility
An offered plan may include as many of these allowed events as desired, but none are legally required. However, plans with greater flexibility may be more attractive to employees.
The federal government sets an individual contribution limit for FSAs and HSAs. For the 2022 tax year, the individual contribution limits were:
- $2,850 for a health care FSA
- $3,650 for an HSA if the employee has a self-only high-deductible plan
- $7,300 for an HSA if the employee has a family plan
HSA limits are higher for the 2023 tax year, becoming:
- $3,850 for a self-only HDHP
- $7,750 for a family HSHP
- $3,050 for a standard or limited-expense HCFSA
Employers can’t exceed these federal maximum contribution limits. However, you may set a lower maximum when offering an FSA or HSA to your employees.
Restrictions on Contributions
Employees must use the money in an FSA before the end of the year or before the expiration of the grace period if there is one. If the funds expire, they turn over to you as the employer. HSA funds may roll over to the following calendar year.
Some HSA funds also allow employees to invest their contributions. Investment account details and rules depend on the plan. FSA funds are not investable.
Allowable Medical Expenses
Employees can use healthcare FSAs and HSAs to pay out-of-pocket medical expenses for themselves, their spouses, and dependents. According to the IRS:
Medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation.
Costs that meet this definition are legitimate uses of FSA or HSA funds. Examples include:
- Prescription drugs and doctor-recommended over-the-counter (OTC) medications
- Wheelchairs or walkers
- Hearing aids
- Diabetic supplies
- Mental health counseling
- Out-of-network doctor visits
- Transportation to doctor’s appointments
The IRS permits using HSA and FSA funds to pay health and long-term care insurance premiums. Employees may also use these funds to cover their out-of-pocket share of any medical costs, whether covered or uncovered.
Recent Changes to FSA Contribution and Use Rules
FSA regulations have been in flux since the federal government enacted the Consolidated Appropriations Act in 2021. The Act temporarily allowed FSA holders to:
- Roll over unused funds to the next calendar year
- Make mid-year changes to FSA contributions without a qualifying life event
Employers can choose whether or not to incorporate these changes. The temporary change was active through the 2021 enrollment year, which means people with FSAs could use 2021 funds through 2022.
However, because the Consolidated Appropriations Act has expired, employees do not have access to 2022 FSA funds, assuming the employer’s grace period is over. They must wait until the next open enrollment period to change their FSA elections.
Maximize Employee Retention With FSA and HSA Benefits
As healthcare costs become top-of-mind for many employees, more companies seek to attract top talent by mitigating those expenses. Offering FSAs and HSAs shows candidates and current employees that you understand their needs and care about their well-being.
Whether you already have FSA and HSA options or are adding them for the first time, it helps to have a partner. Resourcing Edge offers full-service benefits administration and consultation services to help you choose and introduce the right plans. With our expert enrollment processing and professional service center, we’ll have your FSA or HSA — or both — running smoothly in no time.
Offer the kind of benefits package that wows top talent and earns the undying loyalty of your team. Reach out today and join us in the next wave of employee benefits.
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