Getting the “S” Right: It Stands for Spending in FSAs and Saving in HSAs

On a vintage “Weekend Update” segment on Saturday Night Live, Emily Litella expresses outrage about trying to limit violins on television: “Why don’t parents want their children to see violins on television?” Litella says. “I say there should be more violins on television.” It’s up to Chevy Chase to gently explain to her that the concern is not violins, but violence, on television. “Oh, that’s different.” Litella concludes.

As the Employee Benefit Research Institute (EBRI) rolls out its new FSA Database, we hearken back to this skit for a reason: Much like Litella confused violins and violence, people have long confused FSAs and HSAs.

Image courtesy of http://401kcalculator.org

HSAs, or health savings accounts, are savings vehicles. Balances can accrue in HSAs over time, allowing owners to use them as a type of retirement vehicle if they so choose. In contrast, FSAs — or flexible spending accounts — are a type of benefits cafeteria plan. They are meant to be spent down every year, and, in fact, monies not used to pay out-of-pocket health care expenses each year from FSAs are forfeited.[i]

The reason many believe that “optimal” HSA usage involves maximizing HSA wealth at retirement is because HSAs benefit from a triple tax benefit: Employee contributions to the account are deductible from taxable income, any interest or other earnings on assets in the account build up tax free, and distributions for qualified medical expenses are excluded from taxable income to the employee. For years, however, EBRI’s database has suggested “sub-optimal” utilization of HSAs — possibly, in part, because of the HSA/FSA confusion.

The EBRI HSA Database was started in 2014 and contains 10.5 million accounts accounting for $28.1 billion in assets, or 40 percent of the HSA universe as of 2019. The database allows EBRI to examine individual and employer HSA contributions, balances, distributions, transfers, and investments.

What have we learned? In our report on 2019 HSA utilization, we found that nearly 40 percent of accountholders in EBRI’s HSA Database withdrew more than they contributed. Very few accountholders contributed the statutory maximum in 2019, and only 7 percent of accountholders held assets other than cash in their HSAs. These are not the behaviors of individuals seeking to maximize HSA wealth for retirement.

Of course, there are many reasons people may choose not to use HSAs as retirement vehicles, including the fact that they may not be able to afford to pay health expenses out of pocket without tapping their HSA. But the HSA data did lead us to conclude that there are opportunities to improve accountholder engagement with HSAs. For instance, because accounts with employer contributions tended to have higher total contributions and more frequently contained investments other than cash, we were able to conclude that employers can play a crucial role in fostering employee engagement with their HSAs.

So, what does the new FSA Database tell us so far? A representative repository of information about individual FSAs, the database includes 460,000 flexible spending accounts with $563 million in contributions. According to the inaugural Fast Fact from the database, the average worker contributed $1,179 to their FSA in 2019 — which is below the $2,700 limit. Nonetheless, 44 percent of workers forfeited part or all of their contributions in 2019. Among those forfeiting part or all of their contributions, the average forfeiture was $339 and the median forfeiture was $157. As such, one clear conclusion is that there are opportunities for employers to better educate and facilitate fully spending down FSA contributions and avoiding forfeitures.

It is EBRI’s hope that the new FSA Database, along with EBRI’s existing HSA Database, will allow us to continue to shed light on how these vastly different accounts are being utilized. This will allow plan sponsors, providers, and policymakers to better understand how these vehicles are providing benefits to employees — as well as identifying any Emily Litella-like mistakes that may be occurring in their utilization with a goal of improving outcomes.


[i] Employers can let workers roll over $500 of their FSA.  It is also worth noting that the December 2020 stimulus bill gives employers options to give workers more flexibility to get around the “use-it-or-lose-it” rule. 

About ebriorg
President and CEO, EBRI

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