With continually rising health care costs, employers are increasingly looking to consumer driven health plans to help save on expenses. Depending on the model, consumer driven health care plans usually include health savings accounts (HSAs), or flexible spending accounts (FSAs). In most cases, consumer driven health care plans cover a variety of medical expenses but also include more cost-sharing for participants. Also, some plans incorporate a health FSA, or HSA in order to help employees pay out-of-pocket medical expenses on a tax-free basis. With the new HSA limits for 2022, understanding the importance and difference between FSAs and HSAs is essential to saving money for your business. The following is everything you need to know about new HSA limits and the key differences between FSAs and HSAs.
HSA Limits For 2022
What You Need To Know About 2022 HSA Limits
Employers have new limits to keep in mind while preparing for open enrollment season later this year. The IRS has increased the limit for health savings account contributions for 2022. Self only coverage is increasing by $50—from $3,600 to $3,650—and $100 for family coverage—from $7,200 to $7,300. This makes for a 1.4% increase from this year. Meanwhile, minimum annual deductible limits remain unchanged from 2021. Plans will continue with a minimum annual deductible of $1,400 for individual coverage and $2,800 for family coverage. However, out-of-pocket maximum limits increased from $7,000 to $7,050 for individual coverage and from $14,000 to $14,100 for family coverage.
HSA contribution limits are adjusted yearly to reflect changes in the cost of living. Although contributions changed modestly, many people were expecting larger increases to compensate for financial hardships caused by the pandemic. With many businesses still adjusting to the changes brought upon by COVID-19, understanding the ins and outs of health care plans can help save your organization valuable resources.
Breaking Down HSAs
Due to their tax-favored status, HSAs have strict rules regarding eligibility and contributions. In order to make or receive HSA contributions, individuals must meet the following requirements:
- Be covered by a high deductible health plan (HDHP)
- Not have any other health care coverage (with some few exceptions)
- Not be claimed as a dependent on another person’s tax return
- Noy be covered by Medicare
The employer and employee can contribute to the HSA within the same year, subject to annual limits. Employers may allow employees to make pre-tax salary reduction contributions to fund their HSAs. Individuals may also roll over unspent funds in the HSA from year to year. Since the HSA is a tax-exempt account owned by the employee, he or she may keep the account even after termination of employment or retirement.
Breaking Down Health FSAs
Health FSAs provide a means for employees to reduce their income tax liability through salary reduction. Employees are able to contribute a partition of their own salary to an account designated to pay for health care expenses. These pre-tax contributions are exempt from income and payroll taxes. The Affordable Care Act (ACA) limits employee’s pre-tax contributions to their health FSAs to $2,750 (adjusted annually for inflation).
Although health FSAs can be beneficial to you and your employees, there are some strict design requirements that have negatively impacted their popularity. Firstly, while any individual who satisfies the HSA eligibility criteria can make HSA contributions, only employees can participate in a health FSA. Meaning that self-employed individuals can establish health FSAs for their employees, but they cannot set up their own accounts.
Additionally, FSAs have a “use-it-or-lose-it” provision. Generally, employees are required to elect a specific amount of salary reduction at the beginning of the year and then must use every dollar in the account by the end of that year. Since it can be difficult to predict annual medical expenses, employees often overfund the accounts and end up spending unnecessarily at the end of each year to avoid forfeiting that money.
Avoiding This Issue
To help avoid this problem, the IRS allows health FSAs to incorporate either a grace period or carry-over feature. Health FSAs with a grace period allow employees to access unused amounts remaining in an FSA at the end of the plan year to pay for expenses incurred during a grace period of up to two and a half months after the end of the plan year. Alternatively, health FSAs may allow participants to carry over up to $550 of unused funds remaining at the end of a plan year to be used for qualified medical expenses incurred during the following plan year.
Health FSAs are also subject to a uniform coverage rule, which requires the health FSA to operate similar to an insurance plan, with employers assuming the risk of loss.
HSA vs FSA: Which Is Superior?
Overall, the higher limits and contribution rollover of health savings accounts make them the more popular choice between the two. HSAs are more flexible than FSAs, allowing employers to accumulate money over time and save on potential medical expenses. However, in order to qualify for an HSA, your company needs to be covered by an HDHP which may not be the right choice for every business as it comes with large deductibles and high out-of-pocket medical costs. When choosing between the two, it’s recommended to start with your insurance needs and work toward health savings account requirements from there.
Making The Right Choice
Deciding on your organization’s health plan requires an evaluation of the benefits and disadvantages of HSAs and FSAs. No one solution is right for every employer. If your organization is considering implementing a consumer driven health plan, our team at Alltrust Insurance can help you decide which plan fits best for you. For more information on the services we provide, please contact us today and see how we can be of help.