The difference between an HSA and an FSA
the most important differences between an HSA and an FSA are as follows. An HSA is owned and controlled by the individual, whereas an FSA is owned and controlled by an employer. Therefore, individuals are able to continue their HSA after changing jobs which they cannot do with an FSA. Both accounts allow users to apply their savings funds to out-of-pocket medical expenses, and follow strict regulations enforced by the IRS.
About Account-Based Health Plans
As U.S. health insurance costs continue to steadily rise, individuals and business owners look for alternative ways to combat decreased affordability. Today, many employers are adopting account-based health plans (ABHPs) as a strategy to lower the cost of healthcare without reducing coverage for employees. Two popular forms of ABHPs are health savings accounts (HSAs) and health flexible spending accounts (FSAs). This article compares these two types of ABHPs.
Tip: This article contains excerpts from our new eBook “HSA vs. HRA vs. HRP vs. FSA, Understanding Account-Based Health Plans.” Download the free guide here.
What Is an Account-Based Health Plan?
An ABHP is a consumer-directed strategy that pairs a group health insurance plan with a tax-advantaged medical spending account. With a total-replacement ABHP, the medical spending account is offered as the main health benefit plan - instead of a group health insurance plan.
Health Savings Accounts (HSA)
HSAs are individual bank accounts owned by employees that allow for tax-free payment or reimbursement of eligible medical expenses. An employer usually offers an HSA-qualified high-deductible health plan and an HSA.
The employer, employee, or a third party may contribute to an HSA. The maximum contribution amount for 2020 is $3,550 for an individual and $7,100 for a family. In addition, the employee must have an HSA-qualified high-deductible health insurance plan.
The employee can be reimbursed for medical care expenses as defined by Internal Revenue Code (IRC) 213(d), and insurance premiums for unemployed individuals. Any unused HSA funds can be carried over to the next year. In addition to the funds rolling over to the next year, HSAs are portable in the case that an employee is terminated. The employee has continued access to the unused account balance.
There are penalties associated for making non-medical withdrawals. If an employee makes a non-medical withdrawal, they are subject to income tax and a 20 percent penalty tax. However, once the account holder reaches 65 years of age (Medicare eligibility age), or dies, withdrawals for non-medical purposes are subject to income tax, with no penalty for non-medical withdrawals.
Flexible Spending Account (FSA)
FSAs are employer-established benefit plans that allow for tax-free reimbursement of qualified medical expenses. Unlike HSAs, FSAs may not be used towards health insurance premiums. The employer and employee may both contribute to an FSA.
The maximum annual contribution for an FSA is determined by the employer, but is capped at $2,750 per employee for 2020, with annual inflation increases. An employer may offer all of their employees FSAs. In addition, unlike HSAs, FSAs are not tied to a health insurance plan. An employer may offer an FSA without a high-deductible health insurance plan.
The FSA is administered by the employer or a third party administrator. While the employer can choose whether to allow the funds to be carried over into the next year, the rollover amount is capped at $500. Unlike an HSA, FSAs are not portable. FSAs cannot be maintained if the employee is no longer working for the employer.