HSA vs FSA – Which Plan is Right for Your Clients as a Broker?

Key Takeaways

• HSAs and FSAs both allow individuals to use pre-tax dollars to contribute to a healthcare plan, but they differ in areas like spending limits and eligibility requirements.
• HSAs often have higher contribution limits, and the funds roll over year-to-year, but you must be enrolled in an HSA-eligible plan to qualify for an account.
• FSAs offer lower contribution limits, and you can’t carry over funds by year, but you can access the full funds all year long.
• To determine the right plan for their clients, brokers must consider their clients’ needs and eligibility for each plan.

Brokers know that the world of health insurance is detailed and complex, with many potentially confusing options, and relaying that information to clients can be challenging. It’s a broker’s responsibility to educate clients so they understand their options, what to expect, and which ones will best serve their needs.

Health savings accounts (HSAs) and flexible spending accounts (FSAs) are two popular ways for individuals to use pre-tax dollars to contribute to qualified health expenses. However, because these two options differ in several key and subtle areas, like eligibility requirements, it’s important that brokers are able to explain the differences and unique benefits of each for clients and their employees.

When considering an HSA vs. FSA, there are several pros and cons to weigh on each side in order to choose the one that makes the most sense for you to pitch to your clients.

What Is a Health Savings Account (HSA)?

A health savings account is an account that allows you to use income before income tax, Medicare, and Social Security tax deductions to set it aside for future healthcare costs. These funds can be used for qualified medical expenses like prescriptions, over-the-counter medications, medical equipment, contact lenses, and more.

Withdrawals are also tax-free, empowering account holders to use these funds to pay for healthcare expenses and cover important medical equipment they may need. HSAs are tied to the individual, so a person can access the funds throughout their lifetime, even if they switch employers.

However, in order to qualify for an HSA, participants must have a high-deductible health plan (HDHP) designated as HSA eligible, so not everyone can reap the benefits of this plan.

The maximum contribution limit for an HSA plan in 2024 is $4,150 for individuals and $8,300 for families, the highest contribution limit the IRS has allowed so far. Adults age 55 or over are also able to make additional catch-up contributions of up to $1,000 per year.

Pros and Cons of an HSA

HSAs come with their advantages and disadvantages that brokers should be sure to communicate to clients.

Pros

• There are no rollover limits on HSAs. Amounts left over from the previous year will automatically carry over into the next.
• You can invest money from your HSA, allowing you to benefit from compound interest and grow your contributions tax-free.
• HSAs allow you to reimburse yourself for healthcare expenses, helping you make purchases before you have contributed to your account in full.
• Your HSA belongs to you and not an employer, so you’re able to access the funds even after you leave a job.
• You can use HSAs to pay for more than just medical expenses after age 65 without an additional penalty—you will only have to pay relevant income taxes

Cons

• Contributing to an HSA past the contribution limits results in a 6% excise tax on the amount over the limit, plus regular income tax.
• Only those with a high-deductible, HSA-eligible health plan are eligible to open an HSA.
• You can only access funds in your HSA as you contribute them, so even if you plan to contribute the maximum of $4,150 over the year, you will only be able to access a percentage of it throughout the year, depending on what you’ve already contributed up to that point.

What Is a Flexible Spending Account (FSA)?

A flexible spending account (FSA) is another type of savings account that allows you to set aside pre-tax dollars to be used later for qualified medical expenses. Qualified medical expenses for an FSA are similar to those of an HSA, including medical equipment, prescription and over-the-counter medications, dental expenses, and more.

However, an FSA differs in several key ways. Like an HSA, an FSA allows you to contribute pre-tax dollars on a monthly basis, but it comes with different contribution amount limits and eligibility requirements. Unlike HSAs, FSAs can be opened with a traditional health plan.

The maximum contribution limit for FSAs in 2024 is $3,200, an increase of $150 from 2023. A key caveat with FSAs is that they follow a “use it or lose it” rule, so you must spend FSA funds within the same year in order to use them toward expenses. Some cafeteria plans allow you to roll over a maximum of $640, but most plans do not offer the option to carry over funds.

Another important difference from HSAs is that FSAs must be set up by an employer and are always tied to the employer as a result, so if an employee leaves a position, they also lose access to their FSA and the funds in it.

Pros and Cons of an FSA

FSAs come with their own various pros and cons that brokers should discuss with their clients.

Pros

• You can access your full FSA contribution amounts starting the first day of the year, giving you earlier access to funds. For example, if you plan to contribute the limit of $3,200 in a year, you can use this amount for expenses all year long.
• Contributions to your FSA are made before taxes are taken out, allowing you to maximize your earnings for healthcare expenses.
• FSAs do not require a high-deductible health plan, so employees with traditional health plans are eligible to set up an FSA if their employer offers it.

Cons

• You can only open an FSA if your employer offers the option, meaning self-employed taxpayers are not eligible to open an FSA.
• Funds do not roll over like in HSAs, so you must use the funds within the year that you contribute them—otherwise, you will forfeit them.
• An FSA belongs to your employer, so if you switch jobs, you also lose access to your FSA and the funds within it.

Comparing FSA and HSA Head-To-Head

As brokers sell to clients, they must be able to help clients fully understand their options and how an FSA or HSA can benefit them and their employees. Ultimately, the better option depends on each client and their needs. This side-by-side comparison will help clients understand the direct pros and cons of each.

HSA vs. FSA Plans Head-to-Head

Factoring in Client-Specific Considerations

Of course, the biggest factor in determining which plan is the better option will always be your client’s needs. Your first step should be understanding what your clients need from their healthcare plan. From there, you will be able to decide which plan makes the most sense.

If you work with a specific type of client, it may make more sense to favor one more than the other. For example, if you work with clients that will not offer high-deductible plans, then it will not make sense to offer them HSAs. A client that offers traditional health plans should consider offering an FSA instead.

Meanwhile, some employers may prefer the option to minimize healthcare costs by offering an HSA, which allows employees to use their funds in the future and invest those funds for growth. Employers may also prefer the opportunity to save on administrative costs since HSAs often require less paperwork.

Brokers should make the potential benefits clear for each of their clients based on their individualized needs and the types of employer plans they want to offer.

Can You Have an HSA and FSA?

In short, yes, you can have both an HSA and an FSA. However, you are limited if you do choose to offer both. If employees want to open both an HSA and an FSA, they can only pursue a Limited Purpose FSA (LPFSA).

An LPFSA only covers expenses that are not already covered by your healthcare plan, like dental and vision care. Similar to a standard FSA, the planned contribution funds are available from day one of the plan and must be spent within the year.

How To Help Your Clients Choose the Right Plan

Both HSAs and FSAs offer key benefits for clients and their employees, allowing them to maximize the use of their pre-tax income for healthcare contributions. However, the different eligibility requirements and independent benefits of each can make it confusing for clients to determine which is best, so brokers play an important role in explaining both.

Redirect Health partners with brokers to help them better serve their clients. With our industry knowledge and expertise, we’ll provide you with personalized healthcare guidance so you can point your clients in the right direction. We also offer plans that are easy for brokers to sell so that they can attract new clients and see rewarding returns—each offering 24/7 access to quality, low-cost care.

Contact us to learn more about our plan offerings and all the benefits brokers stand to gain from partnering with Redirect Health.