If you’re an employer or benefits administrator, it’s likely that you’ve received your fair share of questions from employees this fall about coverage adjustments during open enrollment. Some of those employees who already have tax-advantaged health savings and flexible spending accounts are also probably asking for clarification on what to do with the sums in these accounts at the end of 2017 and whether or not to continue with their plans.
Now is the ideal time to help employees understand how these universally underutilized accounts work and what makes them so valuable. It’s particularly important to educate employees about their flexible spending and health savings accounts in their first year (or during the first year that a company has made an HSA or FSA available) and during the first two open enrollment seasons. Here are the key messages that every employee needs to hear about HSAs, FSAs and open enrollment at the end of the year:
All HSA dollars roll over at the end of the year; most FSA dollars won’t
While there are many similarities between HSAs and FSAs, some of their most important distinctions arise at the end of the year. Most important, HSA balances can—and ideally will—stay and continue to grow, rolling over into the next year. On the other hand, FSA balances are largely “use it or lose it” by year’s end. Since 2013, however, the IRS has permitted FSA accountholders to carry over $500 annually for expenses in the next year. (Prior to 2013, any unspent funds reverted to the employer’s coffers at year’s end.) Employers can now either allow employees to carry over the $500 to the next year or to spend the remaining funds during a grace period that lasts until March 15 of the following year.
Further, employees can change how much they contribute to their HSA at any point during the year, but can only adjust their contribution amounts to FSAs during open enrollment or with a change in employment or family status. The bottom line: HSAs are for saving money for healthcare expenses, and FSAs are for spending it. HSAs are only for employees with high-deductible healthcare plans, while employers can make FSAs available to any employee.
Opt for an HSA during open enrollment to save for long-term healthcare expenses
HSAs are widely misunderstood. Many people think that these accounts are designed primarily to pay for out-of-pocket medical expenses in the near future (as is the case with FSAs). But the long-term savings value of HSAs is what makes them the most valuable, and during open enrollment, they should be presented to eligible employees as an important part of saving for future medical expenses and retirement.
According to a new report from the Employee Benefit Research Institute (EBRI), two-thirds of account holders ended 2016 with positive net contributions, and over 90 percent of HSAs with individual or employer contributions in 2016 ended the year with funds to roll over for future expenses. EBRI’s report also found that the average HSA balance among account holders with individual or employer contributions at the end of 2016 was $2,532, up from $1,604 at the beginning of the year.
In 2018, contributions to HSAs will be capped at $3,450 for individuals or $6,900 for families, up from $6,750 in 2017.
Opt for an FSA during open enrollment to cover short-term health expenses
A flexible spending arrangement, which employers offer to employees at their discretion, can help cover expenses not covered by an employee’s health plan, including deductibles, copayments and prescription costs.
In 2018, contributions to FSAs will be capped at $2,650, $50 more than the limit for 2017.
More important end-of-year HSA tax information
Not all HSA contributions have to be made by Dec. 31 for an employee to claim a tax deduction. Employees and employers can make contributions to an HSA up until April 16, 2018, for 2017.
Further, as long as an employee was eligible to contribute to an HSA as of Dec. 1, they are considered to be eligible for the whole year and can still make a maximum contribution for the full year. However, they must remain eligible for an HSA through Dec. 31, 2018. If they don’t, they will have to include the amount over-contributed in income and pay taxes and a 10 percent penalty on it.
How should employers communicate the value of FSAs and HSAs to employees? Find tips and ideas in our two part series here and here.