Section 125 Plan vs. HSA vs. FSA: What’s the Difference?

When it comes to saving on healthcare expenses and reducing taxable income, employees and employers have several options. But what’s the difference between a Section 125 plan, a Health Savings Account (HSA), and a Flexible Spending Account (FSA)?

This guide will break down the key differences, benefits, and eligibility rules to help you make the best choice.

What Is a Section 125 Plan?

A Section 125 Plan, also known as a “cafeteria plan,” is an umbrella benefits program that allows employees to pay for certain benefits with pre-tax dollars.

What Can a Section 125 Plan Include?

✅ Health insurance premiums
✅ Dental & vision insurance
✅ Flexible Spending Accounts (FSAs)
✅ Health Savings Accounts (HSAs)
✅ Dependent Care FSAs (DCAPs)

💡 Think of a Section 125 plan as the structure that allows FSAs and HSAs to offer tax benefits. Employers set up a Section 125 plan to let employees pay for qualified expenses pre-tax, reducing taxable income for both parties.

📢 Need a Section 125 plan for your business? Contact The Policy Shop to get started!

What Is a Health Savings Account (HSA)?

An HSA is a personal savings account used to pay for qualified medical expenses, funded with pre-tax dollars.

Key Features of an HSA:

✔ Pre-tax contributions lower taxable income
✔ Funds roll over year after year
✔ Investing options available for long-term savings
✔ Must be paired with a High-Deductible Health Plan (HDHP)

Who Can Have an HSA?

• Must be enrolled in an HDHP (2024 minimum deductible: $1,600 individual / $3,200 family)
• Cannot be enrolled in Medicare or another health plan
• Cannot be claimed as a dependent on someone else’s tax return

HSA Contribution Limits (2024)

• Individuals: $4,150
• Families: $8,300
• Catch-Up Contribution (55+): Additional $1,000

💡 HSAs are great for long-term healthcare savings! Funds never expire, and they can be used in retirement.

What Is a Flexible Spending Account (FSA)?

An FSA is an employer-sponsored account that allows employees to set aside pre-tax dollars for medical expenses.

Key Features of an FSA:

✔ Pre-tax savings on eligible medical expenses
✔ Must be offered by an employer
✔ Funds typically expire at year-end (some plans allow a small rollover)

Types of FSAs:

🔹 Healthcare FSA – Covers medical, dental, and vision expenses
🔹 Dependent Care FSA (DCAP) – Covers childcare expenses for working parents

FSA Contribution Limits (2024)

• Healthcare FSA: $3,200
• Dependent Care FSA: $5,000 (married filing jointly)

💡 FSAs are great for planned medical expenses but have a “use-it-or-lose-it” rule, meaning funds may expire if not used within the plan year.

Comparison Chart: Section 125 Plan vs. HSA vs. FSA

Which Option Is Best for You?

🔹 If you’re an employer: A Section 125 plan lets you offer pre-tax benefits, helping reduce payroll taxes while providing employees with savings.

📞 Not sure which plan is best? Contact The Policy Shop for expert guidance!

Final Thoughts: Maximize Your Tax Savings with the Right Plan

Choosing between a Section 125 plan, HSA, and FSA depends on your employment status, healthcare needs, and tax-saving goals.

✔ Employers benefit from setting up a Section 125 plan to offer pre-tax benefits
✔ Individuals with an HDHP should consider an HSA for long-term savings
✔ Employees with predictable medical costs may benefit from an FSA

🚀 Want expert help? The Policy Shop can assist with setting up the best tax-saving benefits for you or your business.

📢 Get in touch today to start saving more on healthcare costs!