Offering a health savings account (HSA) and limited health flexible spending account (FSA) can significantly enhance your employees' benefits package. These accounts not only help employees save on health care expenses but also provide tax advantages that can benefit both the employee and the employer.

Understanding HSAs and Limited Health FSAs

An HSA is a savings account that allows employees to set aside money on a pre-tax basis to pay for qualified medical expenses not covered by another health plan. Both employees and employers can contribute to the HSA but the account and funds belong to the employee. This means that employees keep and grow their savings year-over-year. To contribute to an HSA, employees must be enrolled in a qualified high-deductible health plan (HDHP) and meet other HSA eligibility criteria.

A limited health FSA is a spending account that lets employees set aside money on a pre-tax basis to pay for qualified vision and dental expenses. Both employees and employers can contribute to this account, but the employer owns the account. This means, if employment is terminated, the FSA funds remain with the employer. Funds in a limited health FSA must be used by the end of the plan year or they will be forfeited, unless rollover, runout, or grace period provisions apply.

Benefits of Offering Both an HSA and Limited Health FSA

When employees contribute to both an HSA and a limited health FSA, they maximize their savings potential. Contributions to these accounts are exempt from Federal, State, and FICA payroll taxes, helping employees save approximately 30%* on eligible expenses. For example, a $1,000 expense costs about $700 with these tax savings.

At EBC, we offer a single Benefits Card for both HSAs and limited health FSAs. This card automatically draws funds from the limited health FSA first for eligible dental and vision expenses, ensuring employees use these funds before they are forfeited at the end of the year. If employees still have eligible dental and vision expenses after using all their limited health FSA funds, the Benefits Card will start drawing funds from their HSA. For eligible medical expenses, the card will draw funds from the HSA throughout the year. If employees don't need to use all of their HSA funds, the funds will continue to grow and earn interest, creating a nest egg for future health care costs or expenses incurred during retirement.

Eligibility Criteria

To participate in an HSA and a limited health FSA, employees must meet specific criteria:

HSA Eligibility:

• Be enrolled in an HSA-qualified HDHP that meets the minimum annual deductible and maximum out-of-pocket expense limit specified by the IRS each year
• Not be another individual's tax dependent
• Not be enrolled in Medicare
• Not be covered by any disqualifying coverage, including a standard health FSA

Limited Health FSA Eligibility:

• Be eligible for their employer's limited health FSA

Transitioning from an FSA to an HSA

What happens if an employer is looking to transition from offering a traditional health plan with a standard health FSA to a HDHP with HSA? There are some compliance issues that should be considered early to ensure that participants are eligible to make the transition from one to the other.

Employers also need to be aware of the impact that FSA grace period and rollover have on HSA-eligibility. Grace period and rollover from one year can impact HSA eligibility for participants in the following year. Read more about this at www.ebcflex.com/hsaeligibility. For our clients who have a standard health FSA with rollover, we offer an auto-convert feature that can transfer any remaining FSA funds that a participant has into a limited health FSA. Limited health FSAs are not considered disqualifying coverage for HSAs because they only cover dental and vision expenses. This is a great feature for participants who are looking to transition from a standard health FSA to an HSA without losing their FSA funds.

Employers have opportunities to amend their plan before the end of the current plan year to minimize the impact of grace period and rollover on HSA eligibility for the new plan year. Talk with EBC to learn about your options today!

By offering both an HSA and limited health FSA, you can provide your employees with valuable tools to manage their health care expenses effectively. This not only enhances their financial well-being but also contributes to their overall job satisfaction and loyalty. Start maximizing your employees' savings today and help them secure their financial health for tomorrow!

*This tax example is a broad approximation of tax liability. Further, your contributions may be subject to state income tax in some states. Your specific savings depend on your tax bracket. You should consult a tax advisor for help with your own situation. Current IRS tax laws control all pre-tax payment and contribution matters and are subject to change.