FSA vs HSA: Which One Is Right to Offer Your Employees

Employers face tough choices when deciding which benefits to offer their employees. There are plenty of options to save money for both your organization and employees, but here we’ll focus specifically on HCFSA (Health Care Flexible Spending Account) vs HSA (Health Savings Account). So which one is right for your benefits package?

What’s the Difference?

HCFSA

There are a variety of Flexible Spending Accounts, but a HCFSA is a tax-advantaged account that is established and owned by an employer. Employees contribute to a HCFSA through payroll deduction on a pre-tax basis. HCFSAs reimburse out-of-pocket health expenses. Employees choose an annual dollar amount to contribute to their HCFSA ( currently $2,850 per year maximum, indexed for inflation), and any money added to their account is untaxed. Unlike a Health Savings Account (HSA), employees can access their entire annual HCFSA contribution amount at the start of the plan year, however, they must continue to fund their HCFSA to pay back the entire annual election amount. Employers can institute a “grace period” of up to two and a half months into the next year allowing employees to claim any remaining HCFSA funds for expenses incurred during the “grace period”. They can also offer a carry-over amount for unused funds, up to $570, that employees may keep for the following year, with the remaining balance belonging to the employer. The HCFSA cannot offer both a “grace period” and “carry-over, it is one or the other.

HCFSAs exist in two different varieties: Medical HCFSA (HCFSA) and Limited Purpose HCFSA (LPHCFSA).

HSA

An HSA, or Health Savings Account, is an employee-owned account that allows an individual to contribute funds tax-free to be used for qualified health expenses. Unlike an HCFSA, you can only contribute to an HSA if you are enrolled in a High Deductible Health Plan (HDHP). 2023 annual HSA contribution limits are $3,850 for individuals with self-only HDHP coverage (up from $3,650 in 2022) and $7,750 for individuals with family HDHP coverage (up from $7,300 in 2022).

One of the biggest benefits of an HSA is the triple tax advantage. Triple tax advantage means that contributions go into the account tax-free, existing funds grow tax-free when invested, and withdrawals are tax-free when used for qualified medical expenses. That’s a lot of savings! Plus, after the age of 65, withdrawals for non-qualified medical expenses are no longer penalized the same way and are simply taxed at your regular income tax rate.

FSA vs HSA: Which One Should You Offer?

Both accounts offer great tax savings for employees and employers alike. When employees reduce their taxable income by contributing to an HCFSA or HSA, it reduces the amount employers must match toward their employees’ FICA tax liabilities, lowering their overall tax obligation. Employers can offer both accounts but an employee can’t enroll in both a traditional HCFSA and HSA at the same time. However, an employee may still be eligible for an HSA if their employer offers a Limited Purpose HCFSA, which only pays for vision, dental, some preventive care and post-deductible expenses.