Although Health Savings Accounts (HSAs) have been around for more than 12 years, many people are still unfamiliar with how they work. Unlike the rules that govern a Flexible Spending Account (FSA), HSAs are quite different, including the ability to change (either add or subtract) contribution amounts outside of open enrollment.
What is an HSA?
An HSA isn’t a healthcare plan in and of itself; it’s the savings account tied to a qualifying high-deductible healthcare plan (HDHP). You can have the health plan without the HSA, but you can’t start an HSA without a qualifying health plan. If, at some point after starting an HSA, you change healthcare coverage to a traditional plan, the *HSA is still yours and can still be used to pay for any medical-related expenses; however, you will be ineligible to continue making contributions to your HSA until you once again have a qualifying HDHP.
*If this is your case, calculate the benefit of interest earned from your contributions in comparison to the bank fee associated with maintaining your HSA. You may want to exhaust a meager account balance unless you’re able to continue making contributions to your HSA.
How HSAs are Similar to an FSA
HSAs and FSAs are similar in functionality, in that:
- Money contributed into an HSA or FSA is not subject to federal, state, or payroll (FICA) taxes; and
- These tax-free contributions can be used for any qualifying health-related expense, including over-the-counter medications when accompanied by a doctor’s prescription.
How HSAs are Different from an FSA
Although similar in purpose, an HSA is quite different from an FSA:
- 100% of elected FSA funds are available on January 1st of the calendar year, even though they won’t be fully funded from each of your paychecks until the end of the calendar year; HSA funds must be funded prior to being used.
- You have to elect FSA contribution amounts during open enrollment, sometimes long before you know exactly how much you’ll need during the year for medical expenses. With an HSA, you can change your contribution amount at any time during the calendar year.
- FSA is a “use it or lose it” program (Stratus.hr client employees are able to roll over up to $500 unused dollars from the previous year’s account balance), whereas 100% of the money in an HSA rolls over from year to year because you own it; it’s your account.
- Only you are allowed to contribute into your FSA; however, both you and your employer may contribute to your HSA, yet all the money contributed is yours.
- The annual contribution amounts differ: for an FSA, the 2016 maximum amount is $2500; the 2016 HSA annual maximum contribution amount is $3,350 for an individual or $6,750 for a family.
- An HSA also allows a “catch-up” contribution for those age 55+ of an additional $1,000/year.
- Money in an HSA gains interest similar to a 401(k) plan; an FSA has no interest-earning potential.
- Non health-related withdrawals can be taken from an HSA after retirement but will be taxed, similarly to an IRA; you lose your FSA funds once you terminate employment.
If you’re looking for a more flexible option for your employees to change their tax-free contribution amounts outside of open enrollment, it might be time to consider offering an HSA-qualifying HDHP. Please contact us for more information.