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A closer look at pre-tax benefits: HSA vs. FSA comparison

What exactly is an HSA or an FSA? Know the differences between various types of pre-tax benefits, including a detailed HSA vs. FSA comparison.

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HSA vs. FSA comparison: What’s the difference? 

In a sea of pre-tax benefit acronyms–HSA, FSA, LPFSA, DCFSA, and more–it can be challenging to discern one from another. What are the differences between an HSA and FSA? How do pre-tax benefits work? Each pre-tax benefit account type is distinct with varied complexities. To clear up potential confusion, we’re providing an overview of what pre-tax benefits are and how the various types of pre-tax accounts work. The information can be used ongoing as an HSA vs. FSA comparison tool for employers and employees.

Health Savings Accounts (HSAs)

Employees enrolled in a high deductible health plan (HDHP) are eligible to open an HSA. An HSA is a personal savings account that allows employees to make pre-tax contributions and then use the funds to pay for eligible out-of-pocket health expenses tax-free. Often, an employer will also contribute to an employee’s HSA making these programs desirable. Employees retain ownership of their HSA funds. Balances carry over from year to year and the savings are portable. 

HSAs offer a federal triple-tax advantage.*

  1. Contributions are deducted pre-tax from an employee’s paycheck.
  2. HSA funds can be invested and earnings are tax-free.**
  3. Withdrawals for qualified medical expenses are all tax-free.

HSA contributions are limited by IRS regulations, which change from year to year. In 2023, employees can contribute up to $3,850 per individual and $7,750 per family. People 55 or older can also make an additional “catch-up” contribution of $1,000.

Employees can invest the funds and defer taxes until they withdraw the gains, or simply wait and withdraw everything tax-free upon turning 65.

Eligible expenses may include the items listed in IRS Publication 502.

*California and New Jersey do not recognize this triple-tax advantaged structure for state income tax purposes. These advantages apply at the federal level. 

**Forma does not require a minimum investment balance.

Flexible Spending Accounts (FSAs)

A healthcare FSA is a spending account that allows employees to use pre-tax dollars for eligible healthcare expenses. Employees can make pre-tax contributions from their paychecks, which allows them to pay for the healthcare services they need while also reducing taxable income. Healthcare FSAs don’t work as long-term savings vehicles. Funds don’t roll over or follow employees when they leave the company. Generally, the money in an FSA follows a use it or lose it rule with unspent funds forfeited at the end of the year.*

Like an HSA, healthcare FSA funds can be used to pay for expenses such as medical, dental, and vision deductibles, coinsurance, and copays for employees and their covered dependents. FSAs are governed by IRS regulations with a  maximum contribution for 2023 of $3,050. 

It’s important to note that those enrolled in a healthcare FSA  cannot contribute or receive contributions in an HSA because the FSA is considered disqualifying coverage in the HSA. The stipulation applies to spouses as well. 

Eligible expenses may include the items listed in IRS Publication 502.

*Some FSAs have provisions known as a grace period or carryover amount that allow for additional time to spend funds or carry over a portion of their prior year's balance into the new plan year. Since these provisions vary, make sure to check in with your vendor regarding what type of provision is included in your plan 

A Limited-Purpose FSA (LPFSA) is a pre-tax spending account that allows employees to use pre-tax dollars for eligible dental, vision, and preventive expenses.* It’s important to note that employees generally should not consider enrolling in an LPFSA unless they (or their spouse) are also enrolled in an HDHP with HSA. The program is compatible with employee coverage in an HDHP while contributing or receiving contributions into an HSA. Unlike the general purpose healthcare FSA, the  LPFSA  is not disqualifying coverage for HSA eligibility purposes.

Eligible expenses may include the dental, vision, and preventive items listed in IRS Publication 502.

*Some LPFSAs allow for medical reimbursements once the minimum statutory HDHP deductible has been met–typically referred to as a “combination FSA”. Employers should encourage employees to review the program policy to find out the details of the spending account.

A Dependent Care FSA allows employees to set aside funds on a pre-tax basis to use on eligible dependent care expenses. Eligible dependents include an employee’s dependent children under the age of 13, a tax dependent, or a spouse who is physically or mentally incapable of self-care. As with healthcare FSAs, DCFSAs are guided by IRS maximums. Employees can contribute up to $5,000 per calendar year ($2,500 if married and filing separately). Many times DCFSAs offer a grace period, but once that deadline passes any unused balances are forfeited and do not roll over into the next plan year. 

Eligible expenses may include the items listed in IRS Publication 503.

Commuter Accounts

While Commuter Accounts are smaller in scale, the benefit can make a difference to employees. Employees use pre-tax dollars to pay for transportation and parking costs incurred for commuting to and from work, such as parking fees and mass transit fares. In 2023, employee contributions are capped by IRS regulations at $300 per month for parking expenses and $300 per month for transit/vanpool expenses. 

Eligible expenses may include the items listed in the “Qualified Transportation Benefits” section of IRS Publication 15-B.

You can also view Health Savings Accounts and other tax-favored health plans for more details from qualifications to contributions outlined by the IRS.

Still, want more information? Choose from one, some, or all the links to view more details on pre-tax benefit programs. 

The pre-tax benefits guide for employer-sponsored HSA, FSA, and Commuter programs

Guidelines for compliant HSA FSA compatible programs

How to drive employee pre-tax education and engagement