HSAs and FSAs Offer Different Benefits Strategies

FSAs have been in existence more than 20 years, and if you ask most people about a health savings account, they will think about FSAs, contends Jeff Munn, vice president of Benefits Policy Development at Fidelity Investments in Boston. FSAs are only intended as expense reimbursement vehicles, unlike more recently introduced HSAs, which are cost sharing vehicles to help people save for their out-of-pocket health care costs, Munn told PLANSPONSOR.

An FSA can be used with any health plan an employer offers—employers don’t even have to have health a plan to offer one—whereas an HSA is designed to be used with a high-deductible health plan (HDHP) offered by the employer—an employee cannot contribute to an HSA unless they are also in the employer’s HDHP, Munn noted.

One nice thing about HSAs is employees can use them for health care expenses as they incur them, and they may also leave their money in an HSA, and it never forfeits—FSAs have a “use it or lose it” rule. According to Munn, participants can invest their HSAs like retirement plan funds. Currently employees can put in $6,000 per year for family coverage, allowing them to save significant amount of money for health care expenses in retirement, which according to Fidelity’s latest estimate is $220,000 (see “Retirees Will Need Almost a Quarter Million for  Health Care”). “In an environment where more employers are not offering post-retirement health care and more employers are moving to HDHPs, if participants have money left over, they should let it build and invest it in longer-term vehicles,” Munn suggested.

One thing plan sponsors should think about, Munn said, is it’s not purely an either-or decision about offering HSAs and FSAs. If the plan sponsor offers an HDHP with an HSA, it can’t offer a general-purpose FSA, but it can offer a limited-purpose FSA that covers just dental and vision.

Cost is more for an HSA if the employer decides to make contributions to it also, which most usually do, but savings could come from offering an HDHP—a less rich health plan, according to Munn.

Research from Fidelity finds Americans who hold the responsibility for making household health benefits decisions are uncertain about HSAs’ features. Two-thirds (65%) of respondents said they do not understand how an HSA works (see "Employees Need HSA Education"). Employees think HSAs have a “use it or lose it” rule also, but they should think of it like an individual retirement account (IRA) for retiree health care—once people understand this are more likely to enroll, Munn said. “Communication and education are key to get employees on board.”

Fidelity offers HSAs and decision support to a wide variety of employers.