U.S. health insurance costs are rising steadily. To combat growing healthcare costs, 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 2015 is $3,350 for an individual and $6,650 for a family. In addition, the employee must have an HSA-qualified high-deductible($1,300 for individual deductible and $2,600 for family 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 than 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.
Health Flexible Spending Account (FSA)
Health 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 $2,500 per employee for 2014, 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.