Whether to offer an HSA, an FSA, or both depends first on the health plans your company has negotiated. This is a plan-design decision as well as an employee-benefit decision, and earlier carrier choices may restrict the available answers. HR teams at mid-size companies often need to explain account options before they have completely worked through the eligibility rules themselves.
This guide is intended for HR teams supporting 100 to 400 employees. It applies to companies establishing these accounts for the first time and to those trying to reduce the recurring open enrollment questions about which account employees should choose.
Begin with the HSA eligibility constraint
Only employees enrolled in a qualifying high-deductible health plan (HDHP) can use a Health Savings Account. This limitation comes from an IRS rule under Section 223 of the tax code, not from a carrier. An employee cannot open or contribute to an HSA while enrolled in a traditional PPO or HMO, or while covered by a non-HDHP plan through a spouse's employer.
That eligibility rule determines the account choices that follow. If the company offers only a traditional plan, an HSA is unavailable. If it offers an HDHP together with a traditional plan, employees who select the HDHP may use an HSA. If the only offering is an HDHP, eligible employees may contribute to an HSA, but they cannot use an FSA for medical expenses. A Limited Purpose FSA for dental and vision only is an exception.
A common mid-size company design includes two options, one traditional plan and one HDHP. Employees enrolled in the traditional plan can use an FSA, while those enrolled in the HDHP can use an HSA. The two employee groups are different, and so are the accounts available to them.
How HSA and FSA accounts differ
Both accounts let employees use pre-tax dollars for qualified medical expenses. Their operating rules are substantially different:
Ownership: The employer sponsors an FSA as a plan-year benefit. When an employee leaves, the FSA balance generally remains behind, subject to limited grace period or carryover exceptions when the plan includes those provisions. The employee owns an HSA, so its balance goes with them and the account continues to exist and accumulate interest regardless of employment status.
Rollover: FSA balances are governed by the use-it-or-lose-it rule. IRS rules permit plan sponsors to offer either a grace period, with up to 2.5 months of extra time to spend remaining funds, or a carryover of up to $640 for plan years beginning in 2025, adjusted periodically. Employers can choose one provision or the other, but not both. HSA funds continue rolling over indefinitely, with no cap and no deadline.
Contribution limits: Annual limits are set by the IRS for both account types. HSA limits are indexed to inflation and announced each year. For a mid-size company, the practical difference is that the HSA allows meaningfully higher contributions than the FSA. That can be important for employees with predictable healthcare expenses or for those using the account as a long-term savings vehicle.
Investment: Once an HSA reaches the threshold established by its account custodian, typically $1,000 to $2,000, employees can invest the funds in mutual funds or other instruments. FSA funds are not investable. This is a meaningful difference for employees who intend to retain HSA funds as long-term savings rather than spend them down each year.
Configuration decisions for HR teams
When accounts are established, HR teams at mid-size companies must answer three configuration questions. Their answers determine what employees can access.
First, does the FSA have a grace period or a carryover? This plan document election affects how employees should set their FSA contribution amounts. If neither provision applies, employees who contribute too much will lose the excess. With a carryover, modest over-contributions move forward. Without clear communication about the selected provision, HR teams can expect urgent December questions every year.
Second, will the company contribute to employee HSAs? Employer HSA contributions are common among companies that offer HDHPs, and they do not need to be large to have an effect. A company contributing $500 per year for each employee narrows the affordability gap between the HDHP and traditional plan for employees concerned about higher deductibles. The contribution is also excluded from payroll taxes, lowering employer cost and employee tax burden.
Third, which account administrator will handle the plan, and what fees apply? The carrier or a benefits administrator included in the broker arrangement generally administers the FSA. HSA administrators differ substantially in their fee structures, investment options, and custodian terms. Employees who leave may discover that monthly HSA maintenance fees gradually consume their balance. HR should understand the fees before recommending the account.
Employee misunderstandings that recur
In early-access conversations with HR teams in our pilot cohort, several misconceptions surfaced repeatedly. These issues are common rather than exceptional.
Some employees think the employer owns the HSA. They may decline the HDHP because they assume its savings account follows the FSA's use-it-or-lose-it rules. Explaining that the account is portable and permanent changes the decision for many employees who would otherwise select the familiar traditional plan.
Employees also contribute to an FSA without first reviewing the carryover terms. They regard the FSA as free money available at the beginning of the year, choose a contribution they will not use completely, and then find in December that the remaining balance is about to disappear. Proactive HR communication about the carryover limit, or the absence of one, reduces this problem.
Employees covered through a spouse's employer may not realize that dual coverage can disqualify HSA contributions. An employee enrolled in your HDHP who is also covered by their spouse's traditional plan cannot contribute to an HSA. This concerns tax compliance rather than carrier policy, and incorrect HR guidance can expose the employee to real financial consequences.
What this article does not claim
This article is not claiming that HDHPs are better than traditional plans or that an HSA suits every employee. High-deductible plans move more cost to the point of care. For employees with chronic conditions or families expecting predictable, high utilization, the deductible exposure may exceed the premium savings. The appropriate plan depends on the employee's circumstances, expected utilization, and financial cushion.
Instead, HR communications about account types should provide the information employees need to assess the choice accurately. Calling the HSA and FSA equivalent without explaining ownership, rollover behavior, and eligibility constraints does not serve employees well. The decision is not symmetric, so the communication should not present it as symmetric.
Communication changes before the next enrollment
When revising open enrollment materials, state these four account facts plainly to improve account communication:
- Whether the FSA has a carryover or grace period provision, including the applicable limit or duration
- Whether the company contributes to employee HSAs, and the contribution amount
- That the HSA permanently belongs to the employee and goes with them when they leave
- That an employee covered by a non-HDHP at a spouse's employer cannot contribute to an HSA and should verify their circumstances before electing
Adding these details to existing materials does not take significant effort. It does remove recurring questions from the list HR must answer one employee at a time during open enrollment, making the season meaningfully less crowded.