Health account comparison
How do HSAs and Health Care FSAs compare?
A Health Savings Account (HSA) and Health Care Flexible Spending Account (FSA) both offer ways to pay for qualified medical expenses and elgible health care expenses while saving on taxes. There are some big differences between how the accounts work.
| HSA | Health Care FSA | |
|---|---|---|
| What does it stand for? | Health Savings Account | Health Care Flexible Spending Account |
| Who owns it? | Employee | Employer |
| Who funds the account and how is it funded? | The employee or the employer can fund the account. Money is deposited directly into the account. Contributions can be made by the employee on an “after-tax” basis or by the employer through before-tax salary deduction. | The employee funds the account. Based on the employee’s annual election, a specific amount is deducted from the employee’s pay check on a before-tax basis. |
| What type of corresponding health plan is allowed? | Eligibility to contribute requires opening and maintaining a Liberty Mutual Consumer Directed Health Plan option. | A Health Care FSA is compatible with any type of health plan coverage other than a High Deductible Health Plan (HDHP). |
| Can unused amounts carry over? | Yes. The individual owns the account and any contributions made to it, regardless of the source or timing of the contribution. | Yes, a Health Care FSA may allow amounts over $50 up to $550 to be carried forward to future plan years. |
| Is the account portable between employers? | Yes. The individual owns the account. | No. FSAs cannot be rolled over to a new employer. |
| Does interest accrue? | Yes, interest may accrue in an HSA. | Interest does not accrue. |
| Is the account subject to COBRA continuation? | No. An HSA is not a health benefit plan subject to continuation. | COBRA rights apply. |
| What is the contribution amount? | Annual contribution limits are established by the IRS. | The annual maximum employee contribution amount is established by the IRS and is subject to change annually. |
| Is there a “catch-up” contribution provision for older workers? | Employees ages 55 and older may contribute more to the account per year until they are enrolled in Medicare. | Not available. |
| Can the account be funded with before-tax salary deduction? | Yes. | Yes. |
| When are the funds available? | An HSA is a bank account owned by the employee. The funds are available as they accrue in the account. | Funds are available for use with eligible health care expenses on the first day of the plan year. |
| What are the tax benefits for employees? | Contributions are tax-deductible and any interest and investment earnings are tax-free. Withdrawals for qualified medical expenses are tax-free, although state taxes may apply. | Employee contributions are payroll-deducted on a before-tax basis. Any funds that are withdrawn to pay for qualified health care expenses are generally tax-free. |
| What health care expenses can be paid from the account? | Funds can be used for any qualified medical expense as defined under Section 213(d) of the Internal Revenue Code (IRC), except for health insurance premiums, with specific exceptions. | Funds can be used for eligible health care expenses as defined under Section 213(d) of the IRC except for health insurance premiums. |
| Can funds be used for non-health care expenses? | Non-health care distributions must be included in gross income and are subjected to a 20% penalty tax in addition to any other income tax due. An exception to the 20% penalty applies to distributions for non-qualified expenses for those individuals who are disabled or deceased.* | No. A Health Care FSA can only be used for eligible health care expenses. |
| Can funds be used for non-health care expenses for those over age 65? | Yes. Non-health care distributions must be included in gross income but are not subject to the additional 20% tax penalty.* | No. The health care portion of an FSA can only be used for eligible health care expenses. |
| Can COBRA premiums be reimbursed from the account? | Yes. Distributions to pay premiums for COBRA are tax-free. | No. A Health Care FSA may not reimburse participants for premiums paid for health insurance. This includes COBRA premiums and premiums paid for health coverage under a plan maintained by the employer or the employee’s spouse or dependent. |
| Must a health care expense be incurred during the plan year the contribution is made? | Expenses can be incurred and paid out anytime after the HSA is opened. | No. The FSA has a carryover feature for unused funds between $50-$550 that can be used in future years if you continue to be enrolled in an FSA. |
| Is third-party substantiation of expenses required? | No. If audited by the IRS, the employee shows that HSA funds were used only for qualified medical expenses. | Yes. Each request for reimbursement must be substantiated before it can be reimbursed. |
*HSA funds used for non-qualified medical expenses are taxed and subject to a 20% penalty if the HSA holder is less than 65 years of age. After age 65, HSA funds for non-qualified medical expenses are taxed (but not penalized).
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