Need to offer a competitive benefits package? Setting up an employee savings plan through a Health Savings Account (HSA) or a Flexible Spending Account (FSA) are popular options that benefit both your businesses and employees. We’re going to look at the difference between HSAs and FSAs to help you figure out what’s going to fit your needs.
Both savings accounts allow employees with health insurance to set aside money for healthcare expenses including deductibles, copayments, coinsurance, and prescription costs. Generally, your employees will receive a debit card for the account which they can use to pay for eligible expenses throughout the year.
Health Savings Accounts and Flexible Spending Accounts both help manage out-of-pocket medical expenses by encouraging savings and minimizing employer and employee tax liability.
Want to know which option is best for your employees? It depends on some important differences between HSA and FSA accounts.
Health Savings Accounts (HSA)
A key difference between HSAs and FSAs is that not all of your employees will be eligible for the HSA. Only employees who have high-deductible health plans, or HDHPs, can select the Health Savings Account.
HDHPs are defined as health insurance plans with high deductibles. In 2019, the IRS minimum deductible is $1,350 for individual coverage and $2,700 or more for family coverage. The HDHP’s out-of-pocket limit can be no more than $6,750 for an individual, and $13,500 for a family.
Small and large businesses are leaning toward exclusively offering HDHPs to their employees. The HDHP helps employers contain healthcare costs by shifting the majority of the cost to employees through higher copays.
And as employees struggle to adjust to rising costs, tax-advantaged plans like Health Savings Accounts (HSA) and Flex Spending Arrangements (FSA) can help them cover expenses with pre-tax dollars.
To qualify for and use an HSA, employees must:
- Only have the HDHP health insurance plan.
- Not be eligible for and participate in Medicare.
- Not be claimed as a dependent on someone else’s tax return.
If your employees do qualify for the HSA, there are a few benefits to this savings plan you should know about.
- No deadline for withdrawal from HSA. Employee contributions to Health Savings Accounts carry overyear after year and go with them even into retirement.
- 3-way tax savings. Contributions to the HSA, interest earned on the HSA, and HSA dollars used to pay for qualified health expenses are all federally tax-free. These tax savings help lessen the tax burden for your payroll and for employees.
- Investment tool. Your employees will enjoy the ability to use the HSA as an investment tool for potential savings and investment growth.
HSA 2019 Contribution Limits
The maximum annual contributions allowed are:
- Individuals: $3,500
- Family Coverage: $7,000
Health Savings Accounts can be a great way to supplement your health benefits. But if the HSA doesn’t fit the needs of your company or employees, a Flexible Spending Account may be the right alternative.
Flexible Spending Accounts (FSA)
Flexible Spending Accounts, also known as flex spending arrangements, are more commonly offered with traditional medical plans.
Health FSAs may be offered if you also offer an ACA qualified health plan to your employees.
With an FSA, employees contribute pre-tax dollars to pay for out-of-pocket healthcare expenses like deductibles, copayments, and other qualified medical, dental, or vision expenses not covered by their health insurance plan.
Learn about the FSA for Dependent Care: What Are Flexible Spending Accounts? The Complete Employer’s Guide
The IRS announced that the 2019 FSA Health pre-tax deduction limit would increase to $2,700 for the individual.
FSA Carryover Rule or Grace Period
The U.S. Treasury Department rules allow employers to offer employees either a $500 carryover for funds remaining in their FSAs at year end or a grace period; employers cannot offer an FSA carryover provision and an FSA grace period at the same time.
The use-it-or-lose-it rule means any remaining funds at the end of the year, or grace period, are forfeited back to your business.
Similar to the HSA, Flex Spending Account contributions are made pre-tax, and distributions are untaxed. This benefits your business and boosts your employee’s take home pay by reducing income subject to FICA (social security and Medicare) or FUTA (federal unemployment) taxes.