HSA vs FSA: Help employees find the best fit during open enrollment

Another open enrollment season is officially upon us, and as employees ponder the benefit choices your organization is offering, they are likely paying extra attention to benefits that support their financial needs and situation. As record-high inflation continues to affect individuals, families, and organizations that provide health benefits, solutions that support physical and financial wellbeing for employees are more important than ever. The good news is, you may already have two essential solutions in your toolbox: a flexible spending account (FSA) and health savings account (HSA).

Health benefits go hand-in-hand with finances, but particularly so at a time when out-of-pocket health care costs are soaring and employees are paying more for everything from bandaids to rent or mortgage payments. It’s no surprise, then, that adoption of FSAs and HSAs continues to increase because of their ability to relieve some of this financial burden. Yet, confusion about FSAs and HSAs persists, and that can lead to lack of utilization by employees, low re-enrollment, poor employee satisfaction scores, and – worst case – forfeitures of unused FSA funds.

HR teams are the key to mitigating employee confusion and to ensuring the employees have a smooth and satisfactory open enrollment. As you launch open enrollment communications this fall, here are four things employees need to understand to better assess and select the account type that best fits their needs.

Account ownership and contributions. Believe it or not, employees who are already enrolled in a tax-advantaged health care account may not even know which plan they are enrolled in. In fact, 65% of employees believe that an FSA and HSA are the same thing. Help employees understand key differences between the two accounts, including:

• Account ownership. An HSA is owned by the employee and all funds belong to the employee, even if they change jobs or retire. An FSA is owned by the employer and unused funds will be forfeited back to the employer if an employee quits or retires (with the exception of any COBRA extension, if applicable).
• Both employees and employers can contribute to an FSA or an HSA. FSA contributions are made with pre-tax payroll contributions and the total amount that an employee elects to contribute is available from day one. HSA contributions are also considered pre-tax, but they can be made via automatic payroll contributions or via contributions throughout the year. Also be sure to communicate the contribution limits for each type of account. For 2024, HSA contribution maximums will increase to an all-time high of $4,150 if you participate in the health plan as an individual, and $8,300 if you participate in the health plan as a two-person or family. This is more than a 7% increase from 2023 contribution limits. While 2024 FSA limits have not yet been announced, Mercer is predicting a more than 5% increase to $3,200. Remind employees that they can change their HSA contribution amount at any time throughout the year, and even if they open an account and choose to not fund initially, they can still incur eligible expenses and later contribute to the account and pay themselves back to receive the tax benefit.

Savings potential. Both FSAs and HSAs allow employees to reduce their taxable income by contributing pre-tax payroll dollars to pay for eligible health care expenses. It’s estimated that employees can save up to 30%, depending on their tax bracket. When it comes to savings potential, a key differentiator for HSAs is the ability to save money for health care expenses in retirement and to invest a portion of unused funds. To help employees plan their contributions and estimate their savings potential, consider directing them to free tools like an FSA calculator, and HSA Style Finder to assess which type of HSA user they are, and HSA calculators that illustrate tax savings potential and future value of the account.

Expanded eligibility rules. The most common questions from FSA and HSA users are related to eligibility. How can funds be spent? All too often, employees are not aware of the extensive eligibility rules for FSAs and HSAs and the fact that many of the wellness items they already buy every day can be purchased with tax-free funds. So, take time to illustrate how employees can use tax-free funds to pay for special health needs and everyday expenses.

For example, encourage employees to think beyond vision and dental care when it comes to their FSA or HSA and educate them about using funds to pay for back-to-school health care expenses like physicals, skincare products for teenagers, everyday over-the-counter medications and pain relief products, menstrual care products, and high-tech health devices. And don’t forget to give employees access to a searchable, online eligibility list that allows them to explore eligible services and products by health need, lifestyle type, and product name or brand.

Related: Rethinking FSAs and HSAs to drive benefits participation and employer savings

Deadline or not? A simple, yet key difference between an FSA and HSA is that FSAs have a deadline by which funds must be spent each year, while unused HSA funds rollover from year to year. For the majority of organizations, the FSA deadline is December 31; however, this deadline can vary based on plan year. Be sure to also clearly communicate any FSA deadline extensions employees have available to them, such as a partial rollover of unused funds, a grace period (2.5 months after your plan year end date; typically March 15), or a run-out period.

Your benefits team has worked hard to develop a portfolio of solutions that support your unique employee needs. By tailoring your communications and education during open enrollment, you can help employees choose the benefits that will best meet their needs throughout the coming year.

Itamar Romanini is vice president and general manager of HSA Store and Rachel Rouleau is chief compliance officer at Health-E Commerce, a family of online stores that includes HSA Store and FSA Store.