Health benefits can be confusing. Surveys indicate that 86% of Americans don’t understand Health Savings Accounts (HSAs) and how they differ from Flexible Spending Accounts (FSAs). That means that after reading this post, you’ll be in that rare 14% of people in the know.
It’s no wonder where this confusion originates: After all, employee pre-tax deductions fund both accounts, and both accounts have strict rules dictating how employees can use those funds. But when you dive a little deeper, it’s clear that both accounts are quite different, each offering benefits and drawbacks.
You want to make sure you’re offering employee benefits to show your staff you care and encourage them to stay with your organization. It’s hard to know the best option to provide if we don’t have a solid understanding of the options and how they differ.
This post will outline the differences between HSAs and FSAs, and highlight the pluses and minuses of each type of account.
What are HSAs and FSAs?
Health Savings Accounts and Flexible Spending Accounts are different types of pre-tax saving accounts you can offer your employees. Pre-tax benefits are helpful to you as the employer because you save money on payroll taxes for any funds your employees deduct pre-tax. With that in mind, you may want to consider offering a savings account of this nature to your employees, but what type of account should you offer? What are the benefits of each for your employees and your business? Is one more difficult to manage than the other? These are essential questions to ask, and we will explore the answers in this post.
ConnectPay has years of experience in the payroll industry. We have access to a network of insurance brokers that assist our clients with all their benefits-related needs. Your small business is unique, but we understand the challenges you face and the questions you have regarding your payroll and benefits. Check out our free resource, the 6 Pillars of Payroll, for more information on payroll and benefits for your small business.
Now, let’s dig into the differences between HSAs and FSAs.
Health Savings Accounts
What are they?
HSAs are savings accounts that are similar in many ways to personal savings accounts. Though this type of account is associated with health benefits, the employee - not the insurance company - has control over the funds within the account. To be eligible for an HSA, the employee’s group health insurance plan must qualify as a high-deductible health plan. The funds are placed into the account before payroll and income taxes are applied, and the employee can access these funds for several healthcare-related expenses.
What expenses are eligible?
There are many healthcare-related expenses eligible for HSA fund use. Doctor visits, eyeglasses, chiropractor visits, and prescriptions are all examples of costs your employees could pay using HSA funds.
What are the benefits?
The main benefit of an HSA is that the account’s funds are added pre-tax. This lowers the employee’s income tax, and your payroll tax, saving you and your employees money. As mentioned above, HSAs are only offered alongside high-deductible health care plans. Employees can deposit funds into this account, allowing them to cover that pricey deductible with pre-tax dollars.
Another benefit of HSAs is that HSA funds are portable. This benefit means that if your employee leaves your organization during the plan year, those funds can move with them. Additionally, if the employee hasn’t used all the funds in their HSA by year-end, they can roll those funds over to the following year.
HSAs also have a higher limit than FSAs. For the 2021 tax year, an employee can defer $3,600 for individual coverage or $7,200 for family coverage into their HSA (compared with a max of $2,750 for FSAs).
Another benefit of HSAs is that, like personal savings accounts, funds in an HSA will earn interest. What’s more, the interest earned on these funds is tax-free.
What challenges are associated with this type of account?
One challenge regarding HSA management is that employees can choose to adjust their contribution amount throughout the year. This fact can make maintaining your employees’ HSAs more difficult.
From your employees’ perspective, the main challenge with HSAs is qualifying for them. If your health plan is not a high-deductible health plan, then an HSA will not be an option for your employees or your business.
Related Read: How Do 125 Plans and HSAs Work Together?
Flexible Spending Accounts
What are they?
Like HSAs, FSAs are savings accounts where the funds are not subject to income or payroll taxes, as long as employees use the withdrawn funds for qualifying expenses. However, where the employee is the owner of an HSA, you will be the owner of any FSAs to which your employees contribute. An FSA can also be set up as a Dependent Care FSA (DCFSA), allowing the employee to use the funds toward childcare or eldercare expenses. Employees are also eligible for FSA contributions regardless of their health insurance. Even if an employee does not have health benefits through your company, they can still take advantage of an FSA if your business offers one.
What expenses are eligible?
The list of eligible expenses for FSAs is pretty extensive. FSA funds can be used for healthcare-related costs like doctor visits, ambulance rides, and prescriptions. They can also use these funds to pay to make their house accessible for a disability faced by them or one of their dependents (if your employee has a DCFSA). Your employees can also use it for transportation and lodging expenses related to medical care.
What are the benefits?
Similar to HSAs, the main benefit of an FSA is that the account’s funds are added pre-tax. This lowers the employee’s income tax, and your payroll tax, saving you and your employees money.
Another benefit of an FSA is that the employee does not have to save the total amount of their account before accessing it. The employee elects the funds they will be contributing to the FSA at the beginning of the year and cannot change their election after this time. The employer then deducts wages per pay period based on the total amount elected divided by the number of pay periods per year. Still, if an employee must access the full amount before year-end, they may do so and will continue to pay into the account to cover that withdrawal for the rest of the year.
What challenges are associated with this type of account?
As an employer, the main drawback is that employees can access the total amount they have elected to contribute before contributing it. Aside from this, FSAs can be relatively simple to manage.
From the employees’ perspective, an FSA has several downsides. For starters, unused funds do not roll over at the end of the year - the employee simply loses them. As the employer is the account owner of an FSA, the funds do not travel with an employee if they leave your company. Any unused funds are lost upon leaving.
Another thing employees may find problematic with an FSA is that they cannot withdraw funds for ineligible expenses under any circumstances. With an HSA, employees can do so but pay a penalty tax on any withdrawn funds. Lastly, funds placed within an FSA do not earn any interest.
The Difference Between Health Savings Accounts and Flexible Spending Accounts
From the overview above, it should be clear that the main differences between HSAs and FSAs have to do with a few elements. Firstly, the types of expenses the deferred funds can be used for. Next, the owner of the account. Third, we consider how employees can access funds, and lastly, whether or not the employee can roll any lingering funds over at the end of the year. Which type of account is best for your organization and your employees? Well, it depends.
ConnectPay understands that your small business’s needs and challenges are unique when it comes to payroll. That’s why we offer personalized support and customer service to our clients. Our payroll experts are ready and waiting by the phone at all times during business hours, so your call will never go to voicemail. We also have a network of local health insurance brokers, and we can connect your business with the perfect broker for you so you can better decide what benefits solutions are right for your company. For more support with all your payroll needs, schedule a meeting with us today!
