Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) are both great ways to reduce your income taxes by paying for medically-related expenses with pre-tax money — that is, money deducted from your paycheck before income taxes are calculated on your pay. While considering FSA vs. HSA, consider that both types of accounts work similarly. You can deposit pre-tax money into either account, and use the account to pay for various tax-deductible medical expenses as they occur. But the two types of accounts operate quite differently.
Some companies offer both an FSA and HSA option for the employees on their small business payroll, depending on which health insurance plan they select. Compare the options between FSA vs. HSA below:
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- Eligibility to Contribute
Eligibility is set by your employer. If you have a high-deductible health insurance plan, you may only contribute to a “limited purpose” FSA used for dental, vision, and other non-medical expenses.
You are eligible if you have a high-deductible health insurance plan that meets IRS definitions. For 2015, the single deductible needs to be at least $1,300 and family deductible at least $2,600. This is unchanged for 2016 and 2017. Also, out-of-pocket expenses for the year cannot exceed $6,550 for single and $13,100 for a family plan (2017).
- Annual Contribution Dollar Limits
For 2016, the IRS has set the limit at $2,550. Your employer may set a lower limit.
In 2016, the IRS has stated the single coverage limit is $3350 and the family coverage limit is $6700. In 2017, the limits will be raised to $3,400 for single coverage and $6,750 for family coverage.
- Account Ownership
Your FSA account is set up and owned by your employer.
The HSA account is a bank account owned by you, regardless of where you work.
- Access to Your Money
You have access to your entire annual election amount any time during the year, even if you have not had all of the money deducted yet from your check.
You only have access to what has actually been deposited into your HSA to date, like any other bank account. If you have a big claim and don’t have enough in your HSA to cover it, you will need to pay for the cost out-of-pocket, and reimburse yourself later as more funds are deposited.
- Use It or Lose It
Maybe. The employer has three options: (1) state that any money you do not spend in your FSA at the end of the year is forfeited back to the company, (2) allow up to $500 to rollover to the following year, or (3) give a maximum grace period of two-and-a-half months after the year ends to use any leftover funds.. On the flip side, if you happen to leave before the year is over, and you’ve already spent more FSA money than what has been deducted from your paycheck, the excess money does not need to be returned.
No, any unused funds in your HSA at the end of the plan year are yours to keep, and stay in your account indefinitely until you spend them.
Your employer or FSA provider may ask you to prove that the money spent was eligible, by submitting a copy of the receipt.
Your employer or HSA provider does not “police” the account, but it’s important that you keep all receipts and documentation for your records in the event of a personal IRS audit. Report annual contributions and distributions on IRS Form 8889.
- Option to Change Contributions
You can only change your election amount if you experience certain qualifying events such as marriage, divorce, birth of a child, etc. Otherwise you are “locked in” until the next open enrollment.
You can change your election amount on a monthly basis, as long as it does not exceed IRS limits, and the amount is in proportion to the number of months you were covered under a high-deductible health plan.
Are all of the different details involved in running your payroll distracting you from what you love about your business? You can track your employees’ deductions for FSA and HSA easily and accurately with Patriot Software’s online payroll software. Try it for free for 60 days!
Limits updated 6/10/2016
Updated 11/20/2015 -to reflect new limits and laws.