What are the Differences Between HSAs and FSAs?

Insurance brokers, as your clients examine options for enrolling in health benefits, you probably hear a lot of questions on plan types. What are my costs? Which best fits my lifestyle? Those inquiries are only the beginning.

If any of your groups offer their employees tax-favored health programs, like Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), be ready to explain the concepts and benefits, as well as the differences if an employer provides more than one option.

While participation is on the rise nationally, some employees might not be familiar with these programs or feel ready to enroll in one due to lack of understanding or mistrust. That’s where you come in. What are the differences between HSAs and FSAs?

Start with the basics. What do these programs do? Enrollees use these accounts, which often are linked to debit cards, to pay for planned or unplanned “qualified medical expenses.” The IRS sets parameters for qualified expenses, which can include general medical and dental costs through the health plans an individual has through his or her employer.

The next point to address might be, “where do the funds come from?” HSAs and FSAs are funded through regular payments by the individual, his or her employer or a combination, depending on the type of account.

Your clients might be wondering, “what’s in it for me?” Well, enrollment in both types of accounts offer certain tax advantages. One example is that contributions made into an HSA or FSA by an employer can be excluded from the individual insured’s gross income. Withdrawals for qualified medical expenses are generally tax-deductible.

Here are a few more basic facts about HSAs and FSAs:

Health Savings Accounts (HSAs)

• Think of it as a personal savings account owned by the individual for paying qualified health expenses.
• Only individuals with high-deductible health insurance plans (HDHPs) are eligible. As HDHP purchases have increased under the Affordable Care Act, more Americans qualify for participation in an HSA.
• Both the individual or employer can contribute to the account. (For 2015, the maximum contributions were $3,350 for individuals and $6,650 for families).
• The individual owns the account; it is portable if the individual changes jobs and contribution levels can be changed at any time.

Flexible Spending Accounts (FSAs)

• FSAs are set up and owned by the employer, but both the individual or employer can contribute to the account. (For 2015, the maximum contribution was $2,550).
• Contributions are typically determined per plan year and cannot be changed.
• Use it or lose it: Money cannot generally be carried over from one plan year to the next, but grace periods up to two and a half months are permissible.
• FSAs are typically not portable with changes in employment

Eligibility. Anyone can open an FSA, while only those individuals with high-deductible health insurance plans are eligible for an HSA, as we mentioned above. For 2016, the individual deductible for an HDHP was $1,300 or higher, and $2,600 or higher for a family.

When the money must be used. An HSA is a savings account. An FSA is a spending account. This is an important distinction. Money in an HSA does not have to be used in the year it's set aside. In many cases, an HSA becomes a lifetime medical savings account. However, funds contributed to an FSA must generally be used the same year it is set aside, with up to a two-and-a-half-month grace period allowed in certain circumstances.

What is considered a qualifying expense. Can HSAs and FSAs be used for medical and dental costs? The answer is yes! Some types of FSAs can not only be used for medical and dental expenses, but also day care for children or elderly dependent adults. Qualifying expenses for an HSA include only health-related expenses, like co-pays, deductibles and drug costs.

If you’re an insurance broker, assume your clients “know nothing” and take the time to explain HSAs and FSAs to those eligible. A great place to start is by addressing misconceptions about these two programs, such as that they are complicated or not a good value.