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What You Need to Know About: FSA & HSA

A conversation with Marcia Stout, HCC Benefits Team Leader

The HCC benefits team provides dedicated individual customer service through enrollment, payroll deductions, answering benefit questions, and reaching out to providers on your behalf. We partner with brokers, health insurance companies, and healthcare professionals to educate employees in navigating the often confusing landscape of benefits.

There are two common and most often misunderstood tools that can save you money on your health expenditures. Simply by using one of these vehicles to pay for health care expenditures for which you are responsible, such as copays and deductibles, you can put money back in your pocket. Which of these you use depends on the medical plan you have selected.  Flexible spending accounts (FSA) are used in conjunction with a traditional PPO medical plan.  Health spending accounts (HSA) are used in conjunction with a high deductible health plan (HDHP).  How they work is basically the same. From your paycheck, you put money into one of these accounts. You then use these funds to pay any medical expenses you are responsible for. This saves you money because when you put your money into these accounts you do so on a pretax basis. This means that you save all the taxes you would pay on those funds. For example, if your effective tax rate was 25% you would save $25 in taxes for every $100 you allocate to these accounts, therefore your spendable income increases. 

Flexible Spending vs. Health Savings

The IRS sets the rules and guidelines for flexible spending accounts, although certain regulations can vary by employer. 

Considerations for a Flexible Spending Account (FSA) include: 

  • Dollars are taken out of your check on a pre-tax basis, reducing your taxable income. 
  • At the beginning of the year, the FSA administrator deposits your total annual contribution onto a flex debit card. Payroll deductions reimburse that amount throughout the year.
  • The IRS limits the amount you can contribute each year and what items are eligible for purchase with that account. There are tax penalties for purchasing non-eligible items with your FSA funds.
  • You must re-enroll in an FSA each year.
  • Only contribute what you think you will spend. You cannot change your contribution amount unless you experience a qualifying life event.
  • The FSA is a “use it or lose it” plan.

Considerations for a Health Savings Account (HSA) include: 

  • Dollars are taken out of your check on a pre-tax basis, reducing your taxable income.
  • The account funds build with each payroll contribution, so you cannot spend more than you have contributed.  
  • You may change your contribution amount at any time throughout the year, as long as you don’t go over the annual limit set by the IRS.
  • HCC requires you to re-enroll in your HSA each year.
  • HSA plans are NOT “use it or lose it”. Unused funds roll over from year to year. If you lose your job or change jobs, the money in an HSA follows you. 
  • Using an HSA for non-eligible expenses will result in a tax penalty unless you are age 65 or older. Once you reach retirement age, you can use HSA funds for non-medical expenses without a tax penalty.

Additional Flexible Savings Account Options

HCC administers other IRS-sanctioned flexible savings options for employees that can also save you money because these funds are also added to these accounts on a pre-tax basis:

  • Limited Flex Spending Account is a pre-tax FSA for employees enrolled in a High Deductible Health Plan (HDHP). It is limited because you can only use this account for dental and vision expenses. For instance, an employee might use the Limited Flex account to offset orthodontia expenses.
  • Transit Flex is available to employees who use public transportation, buses, and taxis to commute for work. Participants can save pre-tax dollars for those expenses. You can update these monthly contributions when needed, and unused Transit Flex funds roll over from year to year. 
  • Parking Flex is a monthly pre-tax savings account reserved for unreimbursed job-related parking expenses. Unused funds will roll over, and you can update contribution amounts at any time. 
  • Dependent Care Flex is a pre-tax savings account employees can use for childcare or preschool expenses. Participants can pay providers with a debit card or personal check.  Typically, an employee must file an annual reimbursement claim, before receiving any funds. 

Contributions and Limits for 2021

For 2021, the IRS has set contribution limits for Flexible Spending Accounts at $2,750.  The IRS limit for Health Savings Accounts for 2021 is set at $3,600 for individuals and $7,200 if you have family coverage. If you are age 55 or older, you can contribute an additional $1,000.  For tax year 2021, the monthly limit for qualified transportation benefits remains $270, as is the monthly limit for qualified parking. The dependent care FSA maximum, which is set by statute and is not subject to inflation-related adjustments, is $5,000 a year for individuals or married couples filing jointly.

Employer Contributions

Employers can contribute to employee FSA, and HSA accounts under specific regulations. FSA employer contribution rules can vary by plan administrator. With an HSA, there are more flexible options for both employee and employer. Many employers will match an employee’s HSA contributions up to a certain amount. Contributions made by an employer into your FSA or HSA account are not included in your taxable income.

Eligible Expenses For Reimbursement 

You can obtain health and wellness items and services, including hearing aids, Lasik surgery, feminine hygiene products, birth control for men and women, diabetic supplies, and prescribed vitamins. You can also use the funds to pay for travel or transportation expenses for medical care.

Although the range of reimbursable expenses is broad, examples of ineligible purchases include teeth whitening, appearance improvement procedures, and weight loss supplements. Other items are only eligible with a prescription or letter of medical necessity from the doctor. 

FSAstore.com and HSAstore.com allow you to use your Flex or HSA card to purchase eligible items online. You will also find a comprehensive and searchable list of eligible and ineligible expenses on each site. You can also visit the IRS website to see more detailed FSA and HSA tax information. If you cannot determine the eligibility of a particular expense, reach out to your HCC benefits coordinator, and we will be happy to assist. 

You can submit a claim form and the accompanying receipt for reimbursement.

Find A Savings Program That’s Right For You 

Flexible spending and health savings accounts provide reserves for unreimbursed spending on benefits. If you don’t use a savings program, start by contributing a small amount and see how it works for you. The savings programs that are available to you can be a benefit from a tax perspective as well as provide a safety net for unexpected expenses.