Some employers consider discontinuing the Health Care Flexible Spending Account (HCFSA) once they begin offering a Health Savings Account (HSA) qualified high deductible health plan. Doing this actually limits access to pre-tax benefits for both the employer as well as plan participants.
Rather than discontinuing an HCFSA, consider offering an HSA compatible HCFSA for dental and vision expenses. This provides a richer benefits package and maximizes the tax savings for both employer and employee.
What type of health care FSA is HSA compatible?
It is true that you cannot be enrolled in a standard HCFSA at the same time you are enjoying the tax benefits of the HSA because it is considered disqualifying coverage. In order to maintain eligibility for tax free contributions to an HSA, participants can enroll in a limited HCFSA. Limited HCFSAs can be used to reimburse plan participants for dental and/or vision expenses. Because of this restricted use, limited HCFSAs are not disqualifying coverage as they do not provide first dollar health care coverage.
Did you know that an employee can maximize their tax savings if they learn to use a combination of HSA and limited HCFSA?
Employees that participate in both the limited HCFSA and the HSA are able to maximize their tax savings. They are able to contribute the maximum to the HSA in addition to contributing up to the maximum to the limited HCFSA. Employees can use the funds in the limited HCFSA for their predictable dental and vision expenses, in addition to either using their HSA dollars for medical expenses or saving these funds and/or investing them for the future.
Do you need to utilize all of the HSA dollars first before you can use the Limited HCFSA dollars?
No, there is no rule that requires the HSA dollars be used first before limited HCFSA dollars. Although, you cannot double dip and use tax free dollars more than once for the same expense.
What are the main reasons an employee would want to contribute to both an HSA and Limited HCFSA if the HSA can also be used for dental and vision expenses?
Employees may want to use an HSA as a savings account for future medical expenses if they don’t have current medical expenses and use the limited HCFSA for current predictable dental and vision expenses.
Employees that accumulate a substantial HSA balance may have investment options available through the HSA custodian that they would not have if they utilize their HSA funds each year. While investing and growing their HSA, the limited HCFSA provides an immediate pre-tax opportunity to pay for predictable dental and vision expenses.
Employees may use the maximum HSA contributions each year for current medical expenses and would not have any balance remaining for current dental and vision expenses.
Employees may want to expand their tax savings when they enroll in both HSA and limited HCFSA.
For a single plan in 2019, an employee can contribute $3,500 in an HSA tax free and up to $2,700 in Limited HCFSA tax free for dental and vision expenses. That provides up to $6,200 tax free for 2019 for someone with single coverage. Individuals 55 or older can also contribute an extra $1,000 to the HSA as a catch up contribution.
For a family plan in 2019, an employee can contribute $7,000 in an HSA tax free and up to $2,700 in Limited HCFSA tax free for dental and vision expenses. That provides up to $9,700 tax free for 2019 for someone with family coverage. Individuals 55 or older can also contribute an extra $1,000 to the HSA as a catch up contribution.
The savings in 2020 will increase with the inflationary adjustments to the annual contribution and annual election limits. (HSA limits for 2020 are $3,550 single and $7,100 family. FSA limits have not been finalized but are projected to be $2,750 for 2020. We are currently awaiting an announcement from the IRS to confirm.)
Employees still like the limited HCFSA experience because of the uniform coverage rule that permits the reimbursement up to the maximum annual election regardless of their balance at the time of the claim. This rule permits an advance to participants based upon their annual election, from future payroll deductions interest free, which might make some expenses more affordable compared with HSAs that must be funded at the time of the distribution need to use the account to pay for current expenses.
Let’s look at an example of how HSA and Limited HCFSA stacking would work:
Jill is enrolled in a single HSA qualified high deductible health plan (HDHP) with a $3,000 deductible calendar year 2019.
Jill takes allergy and asthma medication regularly and has $500 per month in out-of-pocket Rx prescription drug expenses that are applied to the HDHP deductible.
Jill plans to fund the HSA to the maximum and will deposit $3,500 over the course of 2019.
After 6 months of Rx costs, Jill has incurred $3,000 in expenses and will have met her deductible under the health plan. Jill will be able to use the HSA dollars to help her pay for her Rx expenses tax free.
Keep in mind that the you cannot take a distribution from the HSA until the HSA has been funded, which may mean that Jill either needs to accelerate the funding of the HSA to deposit the dollars earlier in the year to keep pace with her expenses, or she may be paying for her expenses through an alternate means like credit card or her regular checking or savings account and then later reimbursing herself as deposits are made to the HSA regularly through payroll.
Jill also knows that she needs to replace her prescription eyeglasses and sunglasses in 2019 and predicts her expense will be $1,600. Because of this, Jill elects to set aside money in a limited HCFSA for her predictable vision expenses. Jill can buy her glasses at any time in 2019 and be reimbursed the full $1,600 regardless of the payroll deductions for the HCFSA at the time of the claim.
The majority of Jill’s HSA dollars are used to pay for her Rx expenses in 2019. It is true Jill still has some HSA dollars available after the $3,000 deductible is met for Rx expense and those dollars could be used for the vision expenses; however, the remaining balance is not sufficient to pay for the entire vision expense in 2019. Jill can rollover any remaining HSA dollars to the next year for future expenses.
By using a combination of the HSA and limited HCFSA, Jill was able to increase her tax savings by having an additional $1,600 of her pay deducted pre-tax under the limited HCFSA.
As you can see there are lots of advantages to using a combination of HSA and Limited Health Care FSA!
Any employers interested in adding the Limited Health Care FSA, should review their plan documents and take the necessary steps to amend the plan. Contact your Client Services Consultant today to learn how!