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FSA vs HSA overview: a guide for small business employers

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10 min read
FSA vs HSA

As a small business owner, offering your employees a comprehensive benefits plan is one of the most effective ways to attract and retain top talent. In fact, according to Forbes, 42% of employees are currently thinking about leaving their jobs due to a lack of benefits. These benefits often include medical, vision and dental plans, and pensions or 401(k)s. An attractive package often also includes a Flexible Spending Account (FSA) or a Health Savings Account (HSA). Understanding the key differences and similarities between an FSA vs HSA is therefore imperative as an employer. Despite this fact, many small business owners are still confused about which plan is best for their workforce. 

In today’s small business guide, we are going to share everything you need to know about FSAs and HSAs. We will also discuss the pros and cons of each plan to help you determine which would work best for your organization.

HSA vs FSA overview 

When it comes to employee benefits, healthcare tends to come out top for most US citizens. This includes health, dental, and vision insurance, but it also includes health savings accounts to help employees save funds to cover their own healthcare expenses. This gives employees more control over their medical care, and it also gives them a much-appreciated tax break.

There are two choices for small business owners looking to include health savings accounts in their fringe benefits packages. You can offer your employees a standard Health Savings Account (HSA), or you can provide them with a health Flexible Spending Account (FSA)

Both types of accounts share a number of similarities. They are both used by employees to pay for medical expenses as defined by the IRS. These expenses include general healthcare, prescriptions and over-the-counter medications. Employees usually get a debit account for their account which they can use to pay directly for qualifying expenses.

However, there are a number of key differences between an FSA vs HSA account that you need to be aware of. That way, you can evaluate which would best benefit both your employees and your business. Before we look at these differences, let’s take a look at these FSA vs HSA definitions in a bit more detail.

HSA 

A Health Savings Account, also known as an HSA, is a savings account that enables employees to save untaxed funds for future qualified medical expenses that might not otherwise be covered by standard health insurance. This might include costs relating to healthcare deductibles, prescription drugs, or dental or vision expenses. Contributions are usually made by both the employer and the employee, and balances can be carried forward from one year to the next.

Essentially, an HSA enables employees with qualifying high-deductible health plans (HDHPs) to regularly set aside untaxed funds in order to cover any unexpected medical costs. This can be a great option if you already offer an HDHP. Plus, if you match an employee’s contributions, then it increases the value of their earnings so that they are able to obtain better access to healthcare when needed. This makes them a much more affordable health benefit option than other more traditional health coverage plans. And because the IRS doesn’t classify these contributions as wages, they are tax-deductible for both employers and employees.

FSA

A Flexible Spending Account, also known as an FSA, is similar to an HSA, with a few notable distinctions.

Put simply, an FSA provides a little more flexibility when it comes to choosing an insurance plan for your employees. Employees still get access to the same type of tax-advantaged account to save funds to cover health care costs. They can contribute funds directly from their paychecks that can then be used to cover the same qualified medical expenses as an HSA. These contributions, as with an HSA, are not subject to income tax, Social Security payroll tax, or Medicare payroll tax

The main difference between an FSA vs HSA plan is that, with an FSA, employees are not restricted to qualified high-deductible health plans. As the name suggests, the plan is far more flexible.

Key differences & similarities HSA vs FSA 

Both Health Savings Accounts and health Flexible Spending Accounts share a number of similarities. However, there are a number of key differences between the two that small business owners need to be aware of. Understanding these differences will help you decide which option would work best for your organization.

Let’s take a look at the similarities and differences between an FSA vs HSA account. 

Similarities FSA vs HSA

  • Both FSAs and HSAs are employee savings accounts designed to help employees pay certain medical care expenses that may not otherwise be covered by their healthcare plan.
  • FSAs and HSAs both offer tax benefits
  • Contributions for both types of accounts are not classed as wages so they are not subject to income tax, Social Security payroll tax, or Medicare payroll tax.
  • There are annual contribution limits for both types of accounts.  
  • Healthcare expenses must be deemed as qualified by the insuring entity for both FSAs and HSAs.

Differences FSA vs HSA

  • Health insurance plan qualification. Your employees only qualify for an HSA if they also have a high-deductible health plan (HDHP). However, you can offer your employees an FSA regardless of the type of health insurance plan they have.
  • Ownership: As the employer, you own your employees’ FSAs, and their accounts are directly connected to their employment status. In contrast, your employees own their own HSAs. If they change jobs in the future, they can transfer their funds.
  • Rollover rules. With an HSA, your employees can transfer their HSA funds from one year to the next. However, with an FSA, employees must use their saved funds by the end of each year. You can claim back any leftover balances. 
  • Pretax deductions. With an FSA, you establish a pretax payroll deduction rate for each of your employees. This rate cannot be changed unless an employee can prove they have experienced a qualifying life event, such as getting married. With an HSA, employees are usually able to change their distribution rates from one month to another. You can also choose to contribute to an employee’s HSA as part of their employee benefits package.
  • Contribution limit. You can only contribute up to $2,750 per employee for an FSA. The limit for HSA contributions is higher ($3,650 for individuals and $7,300 for families).
  • Interest accrual. Employees don’t accrue interest with an FSA. They usually can with an HSA.  
  • Withdrawals. If an employee withdraws funds from an HSA for qualified medical expenses, these funds are not taxed. Employees can also withdraw for non-qualified expenses without being subject to any penalties. However, non-qualified withdrawals are classed as income and will be taxed accordingly. With an FSA, employees can only withdraw for qualified healthcare expenses. 

What business owners need to know 

Before we look at the pros and cons of offering an FSA vs HSA account, let’s take a look at what you and your workforce need to be aware of. That way, you’ll know exactly what you need to take into consideration when you create your employee benefits policy and HR checklist. It will also make it easier for you to determine which plan type might work best for you.

Consider the following questions:

  • Will you also be offering your employees a high-deductible health plan? If you only offer a comprehensive health insurance plan with low deductibles, then your employees won’t be able to contribute to an HSA. In this case, an FSA is probably more suitable.
  • Are you going to contribute to employee plans? If so, how much?
  • Would you prefer to own your employees’ plans? Or are you happy for them to transfer their plans to their next employer if/when they leave your organization?
  • Do you want your employees to be able to transfer their balances from one year to the next?
  • Does your organization have a high turnover rate? (If so, an FSA could be a good incentive to keep employees at your company for longer. This is because you, as the employer, own the plan so they would lose any accrued balance if/when they leave the company)
  • What are the typical demographics of your organization? (For example, if you hire a lot of employees with young children, then you might choose an FSA as employees can use funds to pay for childcare) 

How employers can benefit 

If you have fewer than 50 employees, then you do not legally have to offer a health insurance plan. However, many organizations still do as it can be a great way to attract and retain top talent. Offering an HSA or FSA on top of this can make an employee benefits package even more appealing, helping to boost your employer brand.

Whether you opt for an FSA vs HSA, here are some of the benefits of offering a health savings or spending account to your employees:

  • Tax benefits: HSAs and FSAs can provide you with tax benefits as an employer as contributions are not classed as income by the IRS. This means that you don’t have to pay federal income tax, social security, or Medicare taxes (FICA taxes) on any pre-tax contributions.
  • Employee satisfaction: Including an FSA or an HSA in your employee benefits packages can help you nurture a happy and productive workforce. This is because you will help to relieve the financial stress associated with covering medical bills. 
  • Employer brand: Offering an attractive employee benefits plan with health insurance and a health savings or spending account can work wonders for your employer brand. This is because current and prospective employees will see that you care about the health and well-being of your workforce. And this has never been so important. In fact, according to a new report from John Hancock, 89% of surveyed employees say it’s important for employers to offer financial wellness programs.
  • Attract and retain top talent: The happier your employees are, and the stronger your employer brand and reputation are, the easier it will be for you to attract and retain the talent you need to build a successful business.

What employees need to know 

There are also a few things you need to be aware of from the perspective of your employees. By taking the following points into consideration you will be able to design an employee benefits and compensation package that appeals to current and prospective employees.

Essentially, you need to consider:

  • The average level of medical care that your employees are likely to need. This will depend on a number of aspects, including whether or not they have ongoing or chronic health conditions. It will also depend on the demographics of your workforce. For example, younger employees are less likely to need frequent medical care. An employee survey is a good tool for finding out this information. It can help you collect valuable feedback on the level of care your employees need. However, make sure the survey is anonymous as this is private and confidential information. 
  • Whether your employees need to include any dependents in their health plan. Again, this will depend a lot on the demographics of your workforce.
  • If your employees qualify for a plan. If you are thinking of offering your employees an HSA, then you need to consider whether or not they would be eligible. Essentially, they need to be enrolled in a high-deductible health plan (HDHP). They also cannot be in Medicare or claim as a dependent on someone else’s tax returns.

How to choose between FSA vs HSA 

Whether you offer an FSA or an HSA to your workforce will depend on the needs of your organization. This includes whether or not you also offer a health insurance plan and the type of health plan you offer. It also depends on whether you intend to contribute to the plan and, if so, how much.

To help you determine which option is best for you, let’s look at some of the pros and cons of an FSA vs HSA account. 

FSA pros and cons 

Here are the advantages of choosing an FSA as a small business owner:

  • An FSA can reduce the level of payroll taxes that you pay as an employer
  • Your employees get more flexibility with their healthcare expenses, provided their plan complies with federal laws and regulations relating to contributions, reimbursements, claims substantiation, and other administration issues.

And here are the disadvantages of choosing an FSA as a small business owner:

  • FSAs tend to require a higher level of employer administration than HSAs. 
  • Under the uniform coverage rules, you are required to reimburse any expenses that an employee incurs during their coverage period. If an employee chooses to leave your business during this time, then you will be unable to recover any reimbursed funds.
  • Because FSAs are subject to the use-it-or-lose-it rule, your employees will need to take into account any future medical care expenses when setting their annual elections. This is obviously not always easy to determine 

HSA pros and cons 

Here are the advantages of choosing an HSA as a small business owner:

  • Contributions to HSAs aren’t subject to federal income tax, and the earnings in accounts grow tax-free.
  • Because employees need a high-deductible health plan to qualify for an HSA, you will have lower health insurance deductibles as an employer.
  • Employees can save more money with an HSA. This is because an HSA allows employees to save $3,650 per year (individual coverage) or $7,300 (family coverage). 
  • Unclaimed funds in an HSA rollover at the end of the year, so they are available for future health expenses. This is usually more appealing to employees. Including an HSA in your benefits packages can therefore boost your employer brand. 

And here are the disadvantages of choosing an HSA as a small business owner:

  • Your employees need to be enrolled in a high-deductible health plan in order to qualify for an HSA. This will be an additional expense for you if you don’t already offer one.
  • HSAs have higher deductibles so your employees could still incur large medical bills if they have a medical emergency.

Final considerations HSA vs FSA 

As we have seen, whether you opt for an HSA or an FSA will depend on a range of factors. It’s important to take into account all the considerations we have discussed in this guide. That way, you can make the right choice for both you and your employees.

The one thing that is clear is that whichever plan you decide is best, you will reap a number of benefits as a small business. For one thing, your employees will have greater control over their medical care. They will also be less likely to experience financial stress relating to their healthcare bills. And this, in turn, will have a positive impact on their mental health and well-being. 

And the benefits don’t stop there. Remember, a healthy and happy workforce is not only important for your staff, but also for the good of your business. Your employees will be more motivated, and more satisfied in their jobs. It will increase their organizational commitment and make them more likely to stay with you in the long term. Plus, combined with other appealing benefits such as implementing an employee wellness program, you will develop a reputation as a great place to work. And this will help you attract and retain the talent you need to make your small business a success. 

Ultimately, the most important thing to remember when choosing between an HSA vs FSA is that either option sends out the right message to the world. It shows your current and prospective employees that you are investing in their health and well-being and that you support their best interests. And this is the best way to develop a loyal, committed and productive organization.

Cat Symonds is a freelance writer, editor, and translator. Originally from Wales, she studied Spanish and French at the University of Swansea before moving to Barcelona where she lived and worked for 12 years. She has since relocated back to Wales where she continues to build her business, working with clients in Spain and the UK.  Cat is the founder of The Content CAT: Content And Translation, providing content development and translation services to her clients. She specializes in corporate blogs, articles of interest, ghostwriting, and translation (SP/FR/CA into EN), collaborating with a range of companies from a variety of business sectors. She also offers services to a number of NGOs including Oxfam Intermón, UNICEF, and Corporate Excellence - Centre for Reputation Leadership.  For more information or to contact Cat visit her website or send her a message through LinkedIn.

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