Health Savings Accounts
Health Savings Accounts allow employees to set aside a portion of their paychecks (before taxes) into an "IRA-like" custodial account to save for the future or pay expenses not covered by another health plan. Employers may also contribute to employees’ HSA's. To qualify for an HSA, the employee must also be covered by an IRS qualified high-deductible health plan. Unlike FSA's, unused funds can be carried forward to the future and/or invested. HSA’s are also portable and can be taken to a new employer or used at retirement. An HSA can also be coupled with a "limited" FSA that pays for vision, dental, or preventive care expenses that are not covered by another plan.
Differences between an HSA and an FSA
Health Savings accounts are not 125 plans (though they can be used in conjunction with one). As such, the same restrictions put on a Section 125 Flexible Spending Account (FSA), do not apply to an HSA. As mentioned above, balances can be carried over from year to year. But also, the maximum coverage does not have to be made available during the entire coverage period. (With FSA’s, you can actually spend the money you will be contributing prior to making the actual contributions.) HSA’s also do not have a mandatory 12-month coverage period.
Since an HSA account can be used in conjunction with an FSA, there are some rules that govern such a situation. By default, an HSA must be exhausted before amounts can be paid out of an FSA. This can be changed when an HSA is drafted to specify that payments will be made from this account only when expenses exceed the balance of the FSA. Since FSA funds are forfeited at the end of the year, it is advisable, in many cases, to make this change.
