A Healthy Way to Save: HSAs vs FSAs

When it comes to health expenses, you may hear the acronyms HSA and FSA quite often. However, you may ask yourself, what do they mean and what do they cover? Interactive Brokers’ Senior Manager of SEO and Content, Cassidy Clement, and Total Rewards Manager, Barbara Olander, discuss the basics of these pre-tax accounts, the core differences between the two, and how these help with health care-related expenses. 

Summary – Cents of Security Ep. 12

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement 

Welcome back to Cents of Security podcast. I’m Cassidy Clement, senior manager of SEO and content and Interactive Brokers. Today, I’m your host for our podcast. Our guest is the Total Rewards Manager at Interactive Brokers, Barbara Olander. We’re going to discuss HSAs and FSAs. These pretax accounts offer a way to pay for health care related expenses. However, there are some core differences between the two. Welcome to the program, everyone, and welcome back, Barbara.  

Barbara Olander  

Hi again.  

Cassidy Clement  

So, let’s kick off with just the basics. Most people are going to say thanks for bringing up all these acronyms that I hear of in my employee handbook or manual, but let’s get some basics down. So, the HSA and the FSA health savings account for HSA, a flexible spending account for an FSA, and they’re both allowing you to set aside some money before it’s been taxed to pay for either health care costs or other types of qualified expenses. Can you talk a little bit more about some of the details of what those are and maybe how they differ a little bit?  

Barbara Olander  

Sure. Absolutely.  So, just to reiterate, an FSA is a flexible spending account, and an HSA is a health savings account. The two acronyms and even the titles for them are very, very similar.  So,to provide a little more clarity, an FSA is an employee benefit that allows you, the employee, to set aside money on a pretax basis for certain health care and dependent care eligible expenses. 

So, an FSA can come in a couple of different flavors, let’s say. There is the health flexible spending account. There may also be a dependent care flexible spending account available and even a commuter or a parking flexible spending account. So, that’s one sort of variety. The other option is the health savings account, and that is an investment account available only to employees who are enrolled in what’s called a high deductible health plan, also known as an HDHP. Here, in order to be eligible or have a health savings account available to an employee, the employer must be offering an HDHP type medical plan. So, important criteria to start with, right.  

Cassidy Clement 

And then these qualified medical expenses, these are the typical things that I have heard of when I was on a previous plan, are things that would technically be those medical expenses,  So, some doctor’s visits, lab tests, etc., and usually you could determine the best way to spend this when you look at the actual FSA and HSA eligibility lists, which we have spoken about before, and those can be found online. But the one other piece that I did find while I was going through my research was something called an HRA, which I have never actually heard of. Can you talk a little bit about that?  

Barbara Olander  

Sure. Yes. So, an HRA is another savings vehicle that exists, and it is also tied to the health savings account. An HRA is a health reimbursement account and those are employer funded group health plans from which employees are reimbursed on a pretax basis for qualified medical or health expenses up to a fixed dollar amount per year. That sort of baseline underscores the difference there in that an FSA and an HSA have the employee contribution and component, whereas an HRA does not. 

Cassidy Clement 

So, within these plans, how exactly are these accounts dispersed by the company? In my previous experience, I remember getting like a debit card almost. I know some people may get transfer of funds or a check. What’s the usual distribution style for these plans?  

Barbara Olander  

The mechanics of the distributions frequently depend on the the vendor that the employer uses in the actual account set up. But in general terms, the employee elects, or has a plan available to them which contains some amount of money. The employee then incurs one of the eligible expenses as mentioned before. So, for example, a doctor’s visit contains a copay, a small amount of money that they’re responsible to pay, and then they get to recoup that money either through the uses, as you mentioned, a debit card at the time of the doctor’s visit. Or maybe there is a claims process, meaning the employee is required to prove that they have paid for an eligible expense and then they reimbursed that amount of money following a claim submission. So, it could be a direct payment, it could be a check, it could be a debit swipe.  

Cassidy Clement 

And there is that reimbursement factor, that you had mentioned, where you would pay initially and then look for the reimbursement after. So, some additional details that would be on HSAs and FSAs. I know that given your job, you have a lot more information on how exactly these compare and contrast than the usual person. But as far as I know from my general research and exposure is, as you mentioned, the high deductible is what you would need for initially seeing an HSA. You can try to lower your overall health costs with this. And if you have the HSA eligible plan, you have withdrawals that are tax free because it is pretax, right? What are some other pieces that help with that comparing in contrasting of these plans?  

Barbara Olander  

So, you know, again, to try to touch on the differences between HSA and FSA is probably to say that an HSA is specifically tied to that high deductible health care plan, whereas an FSA, it would be probably a little more flexible for an employee to use. They get a little more freedom in deciding whether they wish to or wish not to participate with their employer. Now, if we look at differences such as who owns the account, both in the HSA and the FSA set up, the employee owns the account, meaning they direct the contribution amount and how they use it. One difference that may exist is who, in addition to the employee, is able to contribute. So, sometimes an employer may be willing to provide additional funds for the employee to use. That’s not a requirement for the FSA accounts.   

Cassidy Clement 

So, what are some contribution limits for these accounts? I’m sure they exist. Yes. So, because these are tax-based accounts, the IRS decides on how much an employee can contribute in any given year for the HSA account in 2023, the contribution limit for the year is $3850 and the employer can contribute $1000. And then obviously that would mean that the employee would contribute to $2850. There is a potential for an additional catch-up contribution of an additional $1000, but that requires an additional consideration for employees’ age.  

Cassidy Clement 

And then are there contribution limits for the other item, the flexible spending account, the FSA? 

Barbara Olander 

Yes.  So, again, it is based on IRS limits or contribution limits. In 2023, the health care FSA contribution limit is $3,050.  And if we were to quickly take a look at the dependent care flexible spending account, the contribution limit for that particular account is $5,000 per household. Or if you are in a household where you are filing separately, the limit would be $2500 per eligible adult or eligible employee in that setup. 

Cassidy Clement 

So, when I was doing some research for FSAs, I noticed something that I really didn’t totally know, which is the employers aren’t legally required to even offer an FSA and it tends to be use it or lose it system.  So, your funds may expire where in an age just say there are some potentials up for earning interest or maybe rolling over or something like that.  Is there any other additional details for the FSA? It just a comparison that’s worth noting.  

Barbara Olander 

Yes.  So, the FSA plans are very much you use it or lose it in a particular year.  So, the the one note of caution for our listeners would be that when they have the opportunity to elect a contribution amount into an FSA plan, they really should try their best to estimate how much, how much of an eligible expense and total figure they will have for the for the plan year in which they’re making the contributions.  So, for example, let’s say your opportunity to enroll for the 2023 plan year is now we’re almost in it. We’re in September right now. That leaves only a few months into the calendar year. The best guidance would be to to try to estimate how much medical expenses you will incur, how many maybe prescriptions you will be paying for things that that normally you would pay for out of pocket, and then use that as the sort of contribution amount to elect. If you elect too much the best option that may exist with your particular plan is that the plan allows you to roll over a small portion of your of your contribution. However, if the rolled over amount is not used timely, it will be forfeited.  So, again, use it or lose it as the bottom line with with FSAs. And it’s important to note. 

Cassidy Clement 

Got it.  So, mainly when you see all of these different acronyms and everything floating around, you may think this is great, how do I get into both? And as far as I know, that’s not really possible unless you go into some limited purpose FSA or flexible spending account, because you can’t contribute to both an HSA and a flexible spending account. The same year, correct?  

Barbara Olander 

Right.  So, as we mentioned before, the HSA requires you to be a part of or eligible for a high deductible plan. The FSA has different requirements.  So, the compatibility of both or the ability of both to be offered doesn’t really happen. It would have to be a very specific circumstance, more likely that the HSA will be available to, let’s say, one individual in the household and an FSA would be available to another individual in the household. So, in that way, I guess technically the family unit could be participating in both. However, it’s more likely that it’s individual plans.  

Cassidy Clement 

Right.  So,then as the one individual, if you wanted both, that really wouldn’t happen. It would be an HSA. And then if you’re lucky enough, the limited purpose FSA, which would then maybe be something like things that aren’t covered under that main insurance policy, maybe it’s dental or vision or something like that. So, when we’re looking at both of these, what are some core differences for recapping for our listeners what they should be taking home with them basically? 

Barbara Olander  

I think we can touch on a couple of different sort of subtopics. One is the is the tax treatment. So, for both the HSAs and the FSAs is they use pretax income for eligible medical expenses.   So, that would be important to point out again, that this is really the main benefit and the main plus for employees to participate in these types of plans. Flexibility, on the other hand, with an HSA, the individual has more control over the funds and what happens with their use, whereas with FSA that, like you said earlier, the bottom line of use it or lose it really comes through. It’s a it’s a less flexible set up and the account is ultimately owned by the employer. You’re participating in an employer sponsored plan. The rollover options FSA is again, typically don’t allow you to rollover, but they may there may be a small amount that you’re able to roll over to a future year. Contribution limits are slightly higher with an HSA, though, again, because they are IRS prescribed, they change over time the account interest.  So, with an HSA, the account acts similarly to a savings account. It earns interest over time. The FSA, on the other hand, the money that you put into it, though on a pretax basis, doesn’t earn any interest. Now, as we’ve pointed out earlier, eligibility for an HSA requires that high deductible health plan.  So, if that’s not something that is available to you, HSA will not be. And for the FSA, you must be enrolled in the plan through your employer.  So, it either is or is not available.  

Cassidy Clement 

Got it. And then for people who are an employer themselves or may be self-employed, is there some difference between the accounts for how those would be applied?  

Barbara Olander  

Well, the short answer is yes. For self-employed people, there may be there are many details to consider. You’re not eligible for a self-employed HSA if you are covered by your spouse’s health plan insurance plan, especially if that plan is not DHP high deductible plan. For an FSA, if you’re self-employed, you won’t be eligible for an FSA. They’re only eligible through an employer. 

Cassidy Clement 

So, if you’re just freelancing, that’s probably not going to show up for you as an option.  So, based on a lot of these things, what I’m gathering is, is that flexibility is the biggest piece when looking at these accounts for what works for you.  So, we’re talking the contribution limits, rolling over, if you leave a company, it seems that HSA are way more portable, transportable, rollover potential, etc., whatever words you want to use versus an FSA, which is don’t use it, you’ll lose it type of scenario. So, we covered a lot of the differences and the items here. What are some normal circumstances for an HSA in an FSA?  So, I know for an HSA that normally you can use it on some qualified medical expenses, things like the lab tests and doctor’s visits and things like that. But I do know for FSA sometimes there’s a commuter element like a transportation element.  Could you give some examples of different ways that these items could be used? I know there’s a list online of what’s qualified for each, but just for a general perspective, give people some understanding.  

Barbara Olander  

Absolutely. So, this is, I think, one of the better features of an FSA plan. And then there are a couple of different varieties of a flexible spending account, as we’ve already talked about.  

There is the health or medical flexible spending account. There is also the dependent care flexible spending account. And last but not least, is the commuter benefit or parking benefit again, depending on how a particular employer has it set up. Now, just to very quickly recap, the health or medical FSA pertains specifically to medical or eligible medical related expenses. 

So, just copays and things like that that we’ve mentioned. Dependent care, flexible spending account allows you to set aside money on a pretax basis for childcare.  So, if you if you are a parent of young children and maybe they attended day care or summer camps, those would be some examples of eligible dependent care expenses that could be covered by your Dependent Care FSA and therefore provide a little bit of a savings again, on that pretax basis contribution. Now, touching on the on the specific part, you mentioned, commuter FSA allow employees to set aside money on their pretax basis to then use on eligible commuter expenses.  So, think about, you know, commuter railroads in New York. There’s the subway in Chicago, it’s the El, whether it be busses or other forms of public transportation, those would be eligible expenses that could be paid for on a pretax basis. 

Parking, as long as it is not at the residence of the employee, would likely also be covered. Obviously, please review the details of your situation and if a parking FSA is available to you through your employer. But yes, FSA could be a really great solution. It could be a financial savings opportunity, but in order to use it fully, you have to be mindful of your sort of expected expenses as well as your usage for particular items. 

Cassidy Clement 

In general, these benefits may cover some/most of what can be used by the individual themselves, but you have to do your research, see what applies to you, see what’s covered or not. But there are some ways for these accounts to work to your advantage of what you need help covering when it comes to health or some other commuting, etc. that are part of your daily life. So, thank you for joining us Barbara. 

Barbara Olander  

Thank you.  

Cassidy Clement 

I think this is very informative for our listeners and as always, listeners can learn more about an array of financial topics for free at IBKRCampus.com. Follow us on your favorite podcast network and feel free to leave us a rating or a review. Thanks for listening.