FSA and HSA Comparison and Changes to HSA Limits

4/12/2018

What are the differences between a medical flexible spending account (FSA) and a health savings account (HSA)?  Both are tax-favored accounts that allow participants to pay for qualifying medical expenses with pretax dollars, but each is governed by different legislation with different requirements:

Descriptor

FSA

HSA

IRS Code Source

Sections 125, 105, &106

Sections 223 & 106

Participation Eligibility

Employee, subject to plan design

Employee covered under HDHP but not under non-HDHP

Reimbursement Eligibility

Employee & employee’s spouse/dependent

Employee & employee’s spouse/dependent

Contributor

Employee, employer, or both

Employee, or employer or
individual on behalf of employee

Maximum Contribution

2017: $2,600

2018: $2,650

2017: $3,400/I; $6,750/F

2018: $3,450/I; $6,850/F

Interest/Earnings

None

Tax free if used for
qualified expenses

Qualified Expenses

Medical expenses defined under IRC Section 213(d)

Medical expenses defined under IRC Section 213(d), plus premiums for Medicare, COBRA, & health insurance (if receiving unemployment)

Penalty for Non-qualified Expenses

Not allowed

Tax plus 20% penalty
(only tax if age 65)

Reimbursement Timing

Election amount, minus reimbursements, available
entire plan year

Withdrawals allowed
up to account balance

Portability

None; unused balances forfeited

Account stays with participant

Balance Carryover

$500 carryover or 2½–month grace period, subject to plan design

Allowed

Dual Coverage (FSA/HSA)

FSA must be limited-purpose/post-deductible if employee
contributing to HSA

FSA must be limited-purpose/post-deductible if employee
contributing to HSA

Cafeteria Plan Document

Inclusion required

Inclusion best practice

COBRA

Applies

Does not apply

ERISA

Applies (including Form 5500
if 100 or more participants)

Does not apply

HIPAA Privacy

Applies

Does not apply

 

As a result of the tax reform legislation passed at the end of 2017, the IRS released Revenue Procedure 2018-18 on March 5, which decreased the 2018 family HSA contribution by $50, from $6,900 to $6,850.  The contribution limit for participants enrolled in individual high-deductible health plan (HDHP) coverage, as well as the other limits for HSA-qualified HDHPs, remains unchanged.

The new tax law changed the basis for calculating inflation from the standard Consumer Price Index to the chained CPI, which results in lower cost-of-living increases.  Using the chained CPI will also lower the cap on salary-reduction contributions to medical FSAs, but Rev. Proc. 2018-18 does not address those limits.

Employers should notify employees of this reduced contribution limit as soon as possible.  To avoid penalties, employees enrolled in family HDHP coverage who have elected to contribute $6,900 must decrease their elections to $6,850, and employees who have already contributed the maximum $6,900 before March 5 must withdraw their excess contributions, including any interest on the excess contributions, as taxable income by April 15, 2019.  It appears employers will not need to treat the excess contributions as taxable wages for W-2 purposes because they presumably had a reasonable belief at the time of the contribution (before March 5) that it was excludable from wages.  Further, employers may automatically reduce employee elections to the new maximum amount.

If you have questions about FSAs or HSAs, call ASR Health Benefits at (616) 957-1751 or (800) 968-2449.

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