What is a Health Care Spending Account?

The intricacies of healthcare insurance can be confusing for employees and employers.

Rising healthcare costs are pushing employees to maximize the value of their healthcare dollars at all costs. Likewise, increasing demand for quality healthcare drives employers to offer enticing benefits packages to attract talent and satisfy existing employees.

Is there a way to address the needs of both parties? We believe that Healthcare Spending Accounts can make healthcare accessible and affordable for employees while keeping costs and complexity low for employers.

In this article, we’ll tell you everything you need to know about Healthcare Spending Accounts and how to get the most out of them, whether you’re an employer or an employee.

Key takeaways

• Health Care Spending Accounts are used for covering specific medical expenses.
• A Health Care Spending Account is the same as a Health Care Flexible Spending Account or a Healthcare FSA.
• Health Care Spending Accounts and Health Savings Accounts (HSAs) are both tax-advantaged accounts designed to help individuals cover eligible medical expenses. However, they have key differences in design, eligibility, contribution limits, rollover rules, and accessibility.
• Employers can include Health Care Spending Accounts as part of their benefits plan, giving employees a convenient way to pay for healthcare.
• The IRS has prescribed a number of rules for using Health Care Spending Accounts, including annual contribution limits, eligibility criteria, and types of expenses they can cover.

What is a Health Care Spending Account?

A Health Care Spending Account is a savings account you can use to pay for healthcare costs. Employers can offer Health Care Spending Accounts as a part of their benefits package to help employees manage their healthcare spending.

Contributions are made with pre-tax dollars deducted from your pay on a monthly basis. You can access your full contribution amount before any payroll deductions. This allows you to pay for procedures essential to your health without worrying about bills.

Health Care Spending Accounts can be used to cover various medical expenses, including but not limited to:

• Co-pays, deductibles, and expenses related to visits to general practitioners, specialists, or urgent care clinics.
• Expenses related to preventive and restorative dental care, including cleanings, fillings, braces, and dental surgery.
• Eye exams, prescription eyeglasses, contact lenses, and solutions.
• Expenses related to mental health services, including therapy sessions and prescribed medications.
• Certain physical therapy programs may be eligible if recommended by a healthcare professional to treat a specific medical condition.

What is a Health Care Flexible Spending Account?

A Health Care Spending Account is the same as a Health Care Flexible Spending Account or a Healthcare FSA. We’ll use these terms interchangeably throughout the article. 

Sometimes, Health Care Spending Accounts are confused with Health Savings Accounts (HSA), another type of Pre-tax account. 

You can learn more about Forma’s different Pre-tax accounts on our Pre-tax Accounts page.

How Health Care Spending Accounts work

Employees decide how much money they want to contribute to their account during the employer's open enrollment period. The contribution is deducted from their paychecks in equal installments throughout the year.

Funds contributed to Healthcare Spending Accounts do not count towards your tax liabilities, so they reduce your overall medical spending.

Each year the IRS specifies a maximum contribution limit for Health Care Spending Accounts. The limit for 2023 was $3,050, and for 2024 it increased to $3,200.

Employees can access their full contribution at the beginning of each fiscal year. Therefore, Healthcare Spending accounts can be immediately used to cover eligible expenses.

When you incur a qualified medical expense as an employee, you can submit a reimbursement claim to your Health Care Spending Account provider. There are other types of reimbursement mechanisms, such as specialized Healthcare Spending Account debit cards. Forma simplifies the utilization of Health Care Spending Accounts by facilitating the reimbursement process and offering the convenience of using the Forma debit card.

To submit a claim, you need third-party documentation with details of the expense to establish eligibility.

What’s the difference between a Health Care Spending Account and an HSA?

A Health Care Spending Account - or a Health Care Flexible Spending Account - is often confused with a Health Savings Account (HSA). Some even use the acronym HSA for both account types, leading to confusion. Let's compare the two to clarify the matter.

Health Care Flexible Spending Accounts and HSAs are both tax-advantaged accounts designed to help individuals cover eligible medical expenses. They have key differences in eligibility, contribution limits, rollover rules, and accessibility.

Here's an overview of the main distinctions between a Health Care Flexible Spending Account and HSAs:

Check out our blog on what is a Flexible Spending Account to learn more about Healthcare FSAs and other types of FSAs available on the market. 

Who are the best Health Care Spending Account providers?

Selecting the best Health Care Spending Account provider depends on individual needs, preferences, and employer offerings. With that being said, here are 3 providers worth looking into.

1. Forma

Forma is a flexible benefits solution platform. Forma has been developed to help companies offer competitive benefits packages while keeping costs low. The platform also saves HR professionals countless hours managing and supporting various point solutions.

Features:

• Employees spend benefit funds on their terms with the Forma Card, via the Forma Store, or claims reimbursement.
• Forma’s dedicated support team handles procurement, administration, fulfillment, and compliance on a 24/7 schedule.
• Forma's award-winning UI lets employers define, manage, and adjust benefits anytime.
• Forma is accessible in over 100 countries across the globe so that employers can deliver custom, region-specific benefits to employees.
• Forma is SOC 2 certified, GDPR compliant, and adheres to WCAG standards expected of global enterprises.

Take your benefits plans to the next level with Forma’s flexible spending accounts.

2. HealthEquity

HealthEquity provides pre-tax accounts and other consumer-driven health solutions. In addition, HealthEquity offers a comprehensive platform for managing various health-related financial accounts.

Features:

• HealthEquity’s platform allows you to manage all your healthcare benefits.
• HealthEquity’s mobile app lets you send payments and reimbursements, view the status of claims, and link debit card transactions to claims and documentation.to 
• HealthEquity emphasizes education, providing resources to help individuals make informed decisions about their health-related finances.

3. HSA Bank

HSA Bank is a benefits platform that provides pre-tax accounts and a healthcare-related financial platform.

Features:

• HSA Bank offers both Healthcare FSAs and Dependent Care FSAs.
• HSA Bank provides a debit card, which can be paired up with a digital wallet (Apple Pay, Samsung Pay or Google Pay) and used to pay for IRS-qualified medical expenses.
• HSA Bank can facilitate the creation of Plan Documents and Summary Plan Descriptions for FSA plans, which are essential documents used to describe the specifics of an FSA plan.

Pros and cons of Health Care Spending Accounts

Pros

1. Health Care Spending Accounts offer employees a valuable tax advantage. Contributions are deducted before taxes, reducing taxable income and providing an immediate financial benefit.
    
2. Employers can contribute to employees' Health Care Spending Accounts to demonstrate a commitment to their financial well-being. This additional financial support not only helps cover medical expenses but also enhances the overall compensation package, contributing to employee satisfaction and retention.
    
3. Health Care Spending Accounts allow employees to set aside pre-tax dollars to cover qualified medical expenses, providing flexibility in managing healthcare costs. This flexibility can be further amplified through Lifestyle Spending Accounts or LSAs, allowing employees to allocate funds toward a variety of lifestyle-enhancing benefits, such as wellness reimbursement, fitness memberships, or other non-medical expenses.
    
4. Health Care Spending Accounts offer convenient payment options. For example, the Forma Card streamlines the reimbursement process for eligible medical expenses. This accessibility ensures that participants can easily access and utilize their funds when needed.
    
5. Health Care Spending Account users have immediate access to the full annual contribution amount at the beginning of the plan year, even though they contribute incrementally throughout the year. This feature ensures that employees can address medical expenses promptly.

Cons

1. Health Care Spending Accounts have a use-it-or-lose-it rule. This means any unused funds at the end of the plan year may be forfeited. Some employers may offer a grace period or limited rollover to address the issue, but there’s no way to retain the entire amount if you haven’t spent anything. 
2. Claim reimbursement from an FSA may involve a verification process. This requires individuals to submit receipts and documentation for eligible expenses. This process can be administratively burdensome. Forma alleviates this issue with its user-friendly processes and UI.
3. FSAs are often tied to employment and are not portable if an individual changes jobs. This lack of portability may limit long-term planning and continuity of healthcare benefits.
4. Health Care Spending Accounts do not offer investment options to grow the funds over time. The contributions are used only for healthcare needs during the plan year.
5. Claim reimbursement from a Health Care Spending Account often involves a verification process, requiring employees to submit receipts and documentation for eligible expenses. This process can be administratively burdensome. 

Who is eligible to enroll?

The employer's benefits plan and policies determine who is eligible to enroll. Common enrollment criteria include the following:

• Employee status: Full-time employees are usually eligible, whereas the rules tend to vary for part-time and temporary employees.
• Enrollment periods: Employees typically enroll during specific enrollment periods, such as the annual open enrollment period, or when they first become eligible for benefits, such as when they start a new job.
• Qualifying life events: In some cases, employees may be allowed to enroll in or make changes to their Healthcare Spending Account outside of the regular enrollment period if they experience a qualifying life event (e.g., marriage, birth/adoption of a child, change in employment status).

Is a Health Care Spending Account worth it?

As an employee, Health Care Flexible Spending Accounts are worth it due to their tax advantages and flexibility. Contributions are made pre-tax, reducing taxable income and providing immediate savings. These accounts cover a broad range of medical expenses, including copays and prescriptions, offering financial flexibility.

Overall, for those with predictable medical costs, a Health Care FSA can be a valuable tool for managing expenses and optimizing tax savings.

If you want to enhance your benefits packages with Health Care Spending Accounts, as well as other types of pre-tax accounts, consider using Forma as your benefits management tool.

Join Forma and start providing customized FSAs at scale.

*This document is for informational purposes. Forma is not engaged in the practice of law. Nothing contained herein is intended as tax or legal advice nor is it intended to replace tax or legal advice from counsel. If you need tax or legal advice, please consult with counsel or a certified tax professional.