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Explaining the Differences, Pros and Cons of Flexible Spending Accounts and Health Savings Accounts

Written on:July 13, 2012
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When it comes to pre-tax benefits, perhaps one of the easiest plans to establish is an employer arranged savings plan. The two most frequent options include the flexible spending account (FSA) or the health savings arrangement (HSA). While they may first appear to be similar in the type of financial benefits they provide, they are different in several ways. This article will explain the differences, along with the pros and cons so you can make the best decision for your needs.

What are Flexible Spending Accounts?

Flexible spending accounts also referred to as flexible spending arrangements or FSAs are special employee self-funded accounts established for the purpose of allocating pre-tax earnings for approved medical and child dependent care expenses. They include the advantage of having more money to pay for medical out of pocket costs, like co-pays and medical services and medicines, as well as using them for daycare expenses.

In most cases, this requires a claim form that is completed by the employee and a reimbursement check is issued by the third-party FSA administrator, so it’s easy to manage from the HR manager’s perspective. The disadvantage of an FSA plan is that employees must use their accounts before a specific cut-off date or they may risk losing their monies, as funds do not roll over to a new plan year. It’s also easy to keep track of your benefits using a flexible benefit plan administration software product.

What are Health Savings Arrangements?

Health savings arrangements are pre-tax plans that are funded by both the employees and their employers. A capped amount of money is established in an account for each participating employee with a special debit card issued to the employee. The funds may only be used for medical only related expenses, not including OTC medication or other expenses. Employees must retain their receipts and claim this at the end of each year in their income taxes.

The advantages with an HSA plan are that it gives employees full access to their medical savings funds at the beginning of the plan year, and unused funds roll over from one plan year to the next. The disadvantage is that the amount that can be set aside pre-tax is limited, and cannot be recovered if the employee uses them in full and then quits the job.

What is the Best Option?

Deciding on whether an FSA or an HSA plan is right for your organization can depend on several factors. If you are a smaller company trying to help defray benefit costs, then an HSA coupled with a High Deductible Healthcare Plan (HDHP) can be a great option. For larger groups that have access to more affordable health benefit options, an FSA can be a better choice because employees have more decision making power over how they will use their funds. Either way, a flexible spending account can provide less administrative responsibility on behalf of your HR team, especially with an FSA management software in place.

For updates and guidelines for using pre-tax flexible spending accounts, visit FlexAccounts online to learn more about managing this type of benefit plan.

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