Making sense of spending accounts
Are you encouraging your people to take advantage of an FSA or an HSA? With so many confusing acronyms in healthcare, your people may be inclined to ignore these benefits extras. After all, who wants another paycheck deduction and a separate account to manage?
The thing is, a spending account isn’t just an additional “nice to have” benefit, but rather an important tool that works in conjunction with health insurance. Almost every plan has some out-of-pocket cost component that a spending account can help offset. But, people too often shy away from them because they don’t understand how spending accounts work or don’t know which to choose. So how can you help your people make sense of spending accounts? We’ve broken down the key differences between FSAs and HSAs to help you communicate the advantages of each and drive enrollment.
Qualified medical expenses can include: medical service and prescription copays, eyeglasses, and even service animals.
First things first—explain “Qualified Medical Expenses”
Spending accounts allow people to set aside money for healthcare costs that are classified as “qualified medical expenses.” The first thing you need to do is make sure your people understand what that means. Qualified medical expenses can include medical service and prescription copays, eyeglasses, and even service animals. However expenses like child care, cosmetic surgery, or using funds to cover your premium, are not allowed. During Open Enrollment, direct your people to the IRS website for a full list of allowed and unallowed expenses.
Now that they know what the money from a healthcare spending account can be used for, you can walk them through the differences between an FSA and an HSA.
The Basics: Flexible Spending Account (FSA)
Who is this for? Pretty much anyone can benefit from enrolling in an FSA.
How are the funds created? FSA funds are deducted from each paycheck up to a maximum of $2550 per year and your company may choose to contribute as well. Though an FSA is structured as “use it or lose it”, based on your plan design, companies can choose to elect for either a $500 rollover or a 2.5 month grace period into the next plan year.
Besides the pre-tax benefit, what is the advantage? FSAs are “front-loaded”, meaning the full amount of a yearly FSA contribution is available at the beginning of the plan year, which can be helpful when unexpected expenses arise.
The takeaway: Anyone who anticipates having medical expenses—even just small copays for prescriptions—in the upcoming plan year can benefit from an FSA. The upside is having all the money upfront, but the downside is that you may have to use it all or risk losing money at the end of the year.
The Basics: Health Savings Account (HSA)
Who is this for? Only people in high-deductible plans like HDHPs and CDHPs can enroll in HSAs.
How are the funds created? HSA funds are owned by you (the member), and you can elect to contribute up to $3350 (the limit is increasing to $3400 in 2017) as an individual, or $6750 per family, per year. These funds are not taxed on deposit (through payroll deductions) or withdrawal, and you can keep any contributions even if you leave the company.
Besides the pre-tax benefit, what is the advantage? Your company may contribute to these funds as well and there is also an option to invest HSA contributions in a mutual fund or other interest-bearing account. The various investment options available depend on the issuing bank, but this is a great feature.
The takeaway: An HSA is a great way to save money on medical expenses both today and in the future—you just have to be enrolled in a high-deductible plan to use it.
When your people don’t enroll in one of the healthcare spending accounts that they are eligible for, they are leaving money on the table that could be used to help them offset healthcare costs. Helping your people understand the key differences between these spending accounts is an important part of increasing their benefits literacy and enabling them to make better choices for both their health and their bottom line.