HSA vs. FSA: Spelling Out the Differences

Everyone knows you can find (and buy) just about anything on Amazon, including medical supplies. While the online mega-retailer has always accepted a long list of payment methods, one recent addition might be just what the doctor ordered.

The company recently announced that it would begin accepting health savings account (HSA) and flexible savings account (FSA) cards as payment. This development marks just the latest in Amazon’s foray into the healthcare industry, which Namely first covered last year.

If you’re currently unenrolled in an HSA or FSA, it might be prime time to reconsider. In this article, we’ll go through the two account types and their potential payroll tax implications.

Health Savings Accounts (HSAs)

The Basics

An HSA is an account you can fund with pre-tax dollars and use to cover certain medical expenses. While everyone is eligible for an FSA (we'll cover that later), you can only elect to withhold for an HSA if you have a high deductible healthcare plan.

HSA funds don't have to be used for traditional medical services. There are plenty of covered, everyday purchases that people use. Common examples of HSA-eligible products are Band-Aids, contact lenses, co-pays, hearing aids, eyeglasses, and even sunscreen. If you know you're going to spend $3,000 in Band-Aids over the next 10 years, why pay tax on it?

Exceptions and Limits

Before you get too excited and sign up for an HSA, the IRS does impose some restrictions. Don’t expect to use your HSA to pay for vacations, vitamins, childcare (for healthy babies), standard toiletries, funeral costs, or most cosmetic procedures.

Also, keep in mind that the amount you can withhold annually for an HSA is subject to federal limits. In 2019, you can contribute up to $3,500 to an HSA if you have single coverage. If you are using the HSA to cover a family, you can contribute double, or $7,000. Similar to 401(k) plans, if you're 55 or older, you can contribute an additional $1,000. Limits aside, there’s good news—HSA plans roll over from year to year, so you can keep your savings!

Jim's Two Cents

In terms of how an HSA affects your taxes, look at it like this. If you earn $40,000 and pay the maximum single coverage in 2019 ($3,500), you would show $36,500 in federally taxable wages on your Form W-2, assuming you don't have any other pre-tax deductions.

So where does that $3,500 go? As an HSA participant, you will receive a debit card linked to your account. You can then use those funds on eligible medical expenses and goods like the ones mentioned above, and now you can buy those goods on Amazon.

Be careful not to use the card on non-eligible Amazon purchases. If you spend those funds on a Kindle purchase, for example, you’ll have to pay income tax on that amount. That includes a 20% penalty for those 65 and under.


Flexible Spending Accounts (FSAs)

The Basics

While FSAs are similar to HSAs, there are important differences. Both plans provide pre-tax advantages, and both are used for out-of-pocket expenses and the same eligible medical supplies mentioned earlier.

The similarities stop there. First, FSAs are set up by an employer for employees to help cover medical expenses or dependent care expenses. While an HSA account will follow you from job to job, an FSA plan is specific to your current employer. One of the reasons is that with an FSA, the maximum annual amount can be taken before a full contribution is made. We'll dig into that in our next section.

Exceptions and Limits

In 2019, an employee can contribute up to $2,700 into an FSA, significantly less than an HSA plan. For an employee who is maxing out their FSA in a biweekly pay frequency ($2,700 ÷ 26 = $103.85) as soon as they make their first contribution of $103.85, they can call upon the entire $2,700 for that year.

Unlike an HSA plan, FSA contributions do not carry over from year to year. It should be noted that, depending on your plan, you may be eligible to carry over up to $500 into the new year. Another difference is that FSA deductions can only be changed during open enrollment (or with a qualifying event), whereas HSA amounts can be changed at any time.

What have we learned? Basically, both FSA and HSA accounts have perks for managing your common healthcare expenses throughout the year. In simplest terms, HSAs offer higher limits and carryover while FSAs are available to all with immediate full contribution use. So if you think Amazon has a chance of being around for a while, you might want to grow your medical savings in an HSA, but if you have a low deductible medical plan and expect to use your pre-tax amounts quicker, an FSA might be right for you.

It’s likely that Amazon's announcement will rekindle interest in HSA and FSA enrollment. Of course, Amazon will need to make it as simple as possible to toggle between saved card information and distinguish what purchases are FSA and HSA eligible. Either way, the benefits and payroll community will watch whether other online mega-retailers follow in Amazon's footsteps.

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