Choosing the correct healthcare plan can be difficult. For families with two working adults, this decision becomes even more complicated. Do you split into two plans or select one employer’s plan and join as a family? After making that decision, you’ll need to choose between enrolling in a health flexible spending account (FSA) or a health savings account (HSA). Utilization of either option offers attractive tax benefits for taxpayers to consider. Both options share the common goal of using pre-tax dollars to pay for qualified healthcare expenditures. It’s important to understand both plans to make the right choice for your family.
A key distinction between the two plans is who has ownership and control over the account. An HSA is owned by the employee, meaning an HSA is not tied to employment. Therefore, termination of employment will not forfeit the account balance. In fact, an employee or a self-employed taxpayer can set up an HSA through a bank, credit union, or brokerage institution.
An FSA, on the other hand, isn’t so flexible in that an employee can only participate in a plan through their employer. Termination of employment may cost an individual their remaining account balance. While the Taxpayer Certainty and Disaster Tax Relief Act of 2020 allowed for post-termination reimbursements from health and dependent care FSAs through the end of the 2021 plan year, this relief is no longer available.
The HSA offers a higher contribution limit in 2022 of $3,650 for self-only coverage and $7,300 for family coverage. HSA contribution amounts can be adjusted at any point during the year. This amount is higher than the FSA due to the potential for higher out-of-pocket expenses and to accommodate the savings feature of the plan. Conversely, FSAs allow just $2,850 in annual contributions for both individual and family accounts. The annual contribution for an FSA must be determined during the open enrollment period and cannot be adjusted after open enrollment closes.
The HSA allows taxpayers over 55 to make a catch-up contribution up to $1,000 per year. This is available until age 65 or until enrolling in Medicare.
FSA “Use It or Lose It”
The online marketplace is well represented with stores dedicated to spending FSA dollars. These sites are marketing to taxpayers who need to spend their funds to avoid forfeiture under the “use it or lose it” rules. Employers have two options to avoid application of these rules:
- Employers can include language in the plan to allow for an optional grace period, extending no later than March 15 of the following year, in which employees may spend current-year funds.
- Employers can allow plan participants to carry over up to $570 of their unused balance to the following year.
The Taxpayer Certainty and Disaster Relief Act of 2020 permitted an employer to amend its plan and allow for a 12-month grace period and a carryover of all unused benefits. Like the post-termination reimbursement rules, this relief expired in 2022. Taxpayers will need to remember to monitor their account balance to avoid forfeiture of their contributions.
Because the HSA is a savings account, the “use it or lose it” rules don’t apply. The plan is designed to pay for qualified medical expenditures, like an FSA, with the added benefit to save for future healthcare expenditures. Some plans give the owner the ability to invest the account’s available funds. Any realized gains from the investment are tax-free when used to pay for qualified medical expenses.
Choice & Eligibility
Taxpayers may not have a choice between the two plans, however. HSA accounts are only available to individuals or families participating in a high-deductible healthcare plan (HDHP). For calendar-year 2023, an HDHP is defined as a health plan with an annual deductible that is not less than $1,500 for self-only coverage or $3,000 for family coverage, with annual out-of-pocket expenses that don’t exceed $7,500 and $15,000, respectively. If a plan doesn’t meet these criteria, then the only option is participation in an FSA account.
Once you understand the differences in both plans, you may question the “flexibility” of the FSA. Even though it’s less flexible than an HSA, an FSA is still beneficial because employees can save up to $1,000 in taxes with the maximum contribution of $2,850. Those who determine an HDHP is the appropriate health plan for their family may pair it with an HSA and achieve even more tax savings, with the added benefit of investing in their future healthcare. Choosing a low- or high-deductible plan is a decision that you should make based on your family’s healthcare needs. Tax advantages may serve as a tiebreaker if you are unsure which plan is right for you.
For more information on healthcare accounts or other fringe benefits, IRS Publication 15-B is a great resource.
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Read more articles from FORVIS' 2022 tax guide here.