Even with health insurance, out-of-pocket expenses can be a huge strain on your employees’ budgets. When choosing health care options for your business, it’s important to consider total health care costs, not just insurance premiums. Luckily, there are flexible spending accounts (FSA) and health savings accounts (HSA) to help ease the financial burden. Understanding the differences between the two will help you provide the type of benefits that employees are looking for and increase your employee retention.
Both HSAs and FSAs are tax-free accounts that are used to pay for qualified, health care-related expenses, such as deductibles, copays, and prescriptions. Employers are not required to contribute, but sometimes they will make contributions. The big difference between HSAs and FSAs is that FSA funds don’t roll over from one year to the next while HSA assets do. In other words, if employees don’t use all the FSA funds contributed by the end of the year, they are forfeited to the employer.
As a Professional Employer Organization (PEO), Resourcing Edge makes it easy to understand benefits options and insurance requirements. We offer a wide variety of services to help you provide the best benefits for your employees, including access to Fortune 500-level benefits at a price you can afford. In fact, for Resourcing Edge clients open enrollment is right around the corner, so if you currently don’t provide insurance benefits or you don’t have FSA/HSA options, you might want to talk to us. Contact Resourcing Edge today with all of your benefits-related questions.
What Is a Flexible Spending Account?
A flexible spending account, sometimes known as a flexible spending arrangement, is a special savings account that employees put money into for use with out-of-pocket medical bills and other health-related expenses. Many companies provide FSAs on top of other health insurance offerings. FSA funds can be used to pay for health expenses not covered by insurance, such as copayments, deductibles, dental, eye care, and optional treatments.
Employees must decide how much money to put into an FSA during open enrollment each calendar year. FSA contributions are typically deducted in equal amounts from the employee’s paycheck throughout the year. Employees don’t pay any taxes on the money in an FSA, but any FSA money that isn’t spent by the end of the year (or in the subsequent 75 day run-out period) gets forfeited to the employer. Unused funds do not carry over to the next plan year unless as the employer you decide to offer a grace period, which may allow a carry-over. The only way to change or revoke an FSA before the end of the year is if there has been a change in employment or family status specified in the plan.
Eligible health care expenses for FSAs are described in Section 213 (d) of the IRS code. For detailed information on qualified medical expenses, refer to IRS Publication 502, Medical and Dental Expenses. The IRS defines medical expenses as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body.” These expenses include payments for medical services, including the costs of any needed equipment, supplies, and diagnostic devices.
Employees enrolled in an FSA can use those funds to pay for medical and dental expenses for spouses and dependents.
As long as FSA money is used before the end of the year, the amount saved by employees is equal to the amount of taxes they would have paid on the money set aside. FSA funds can be used immediately for health care costs if the employee plans on contributing the necessary amount by the end of the year.
What Is a Health Savings Account?
A health savings account is a savings account that works in conjunction with a high-deductible health plan (HDHP). Like an FSA, employees set aside money on a pretax basis to pay for any out-of-pocket health-related expenses, including deductibles. If employees were to pay for the deductible with after-tax dollars, they would be spending much more than if paying with pretax dollars.
Unlike an FSA, HSA funds do roll over from one year to the next and can follow employees if they change jobs. They can also earn interest and be invested. Usually, FSA money is lost if employees quit unless they have COBRA coverage and they continue to make FSA contributions during that time.
FSA vs HSA
In order to qualify for an HSA, employees must have a high-deductible health plan, and no other health plan. For 2019, the IRS defines an HDHP as “any plan with a deductible of at least $1,350 for an individual or $2,700 for a family.” For 2020, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family.
Additionally, employees can’t be enrolled in Medicare or be claimed as a dependent on another’s tax return.
The only eligibility requirement for an FSA is that employees get it through their employer. Self-employed people aren’t eligible. Unlike an HSA, employees can have a low-deductible health plan and still qualify for an FSA.
While employees can have both an FSA and an HSA, traditional FSAs aren’t allowed. Employees who opt for both may only use a Limited Purpose FSA (LPFSA) with a health savings account. The LPFSA allows for contributions to pay dental and vision expenses only.
FSA: For 2019, the contribution limit is $2,700. 2020 contribution limits haven’t been released yet.
HSA: For 2019, the contribution limit for individuals is $3,500. Families can contribute $7,000. For 2020, you can contribute $3,550 for self-only coverage and $7,100 for family coverage.
Keep in mind that the IRS sets contribution limits every year.
HSA providers allow employees to change the contribution amount at any point during the year for individuals. FSA contributions, on the other hand, can only be changed during open enrollment or if there has been some change in the account holder’s status.
FSAs and HSAs can be used for the same qualified medical expenses. The only real difference is that HSAs can be used to pay for old medical bills because the funds roll over from one year to the next. But employees with an LPFSA, remember, will be restricted to using the funds for qualified vision and dental expenses.
- FSAs and HSAs offer tax benefits and have annual contribution limits.
- HSA funds roll over, FSA funds do not (unless the employer allows up to $500 in some cases).
- FSA funds must be used by the end of the plan year or they will be forfeited (a grace period of 2 ½ months may be offered).
- HSA funds can be invested, FSA funds cannot.
- FSA must be set up through you as the employer.
- Employees cannot contribute to both HSA and FSA unless it is an LPFSA for dental and vision expenses.
Flexible spending accounts and health savings accounts are both effective ways to curb health care costs. Many people prefer HSAs for their added growth and flexibility. HSA funds accumulate over time since they get rolled over year after year, even in retirement. HSA funds can be invested. The money earned in an HSA account through interest, dividends, and capital gains is tax-free. And since HSA accounts have a higher contribution limit, there are bigger tax benefits. The money in an FSA does not grow because it can’t be rolled over or invested. Remember that in order to qualify for an HSA, your employees need to participate in a high-deductible health plan.
Maximize Employee Retention With FSA and HSA Benefits
Increasingly, employers are looking for ways to use their benefits package for attracting and retaining top talent. And with the rise of high-deductible health plans, FSAs and HSAs are gaining popularity. It’s important to educate employees on the benefits of these tax-advantaged accounts.
Ensure your employees have all the information they need during open enrollment and throughout the year with a PEO and Human Resource Management System on your team. Resourcing Edge’s intuitive re360 Employee Self-Service (ESS) system provides employees with access to a variety of useful tools and resources and can easily update benefits enrollment.
Contact Resourcing Edge today for strategic benefits administration and consulting. We’ll help you identify the best benefits for your business, including creating, managing, and maximizing benefits for employees.