HSA vs. FSA: How to Choose the Right Pre-Tax Account to Offer Your Employees
March 13, 2016
Rising healthcare and insurance costs increasingly burden both businesses and their employees. Utilizing a tax-advantaged medical savings account, like a Health Savings Account (HSA) or Flexible Spending Account (FSA), can lessen the load. For businesses, providing benefits to your employees to help them mitigate the rising costs of healthcare can be an excellent way to build loyalty and show that you support your team. For employees, these accounts provide a way to prepare for expected (and unexpected) yearly medical costs.
So, what exactly do HSAs and FSAs do? HSAs and FSAs each provide tax savings on health costs that allow people to save specifically for medical expenses. They are a way for people with health insurance to set aside money for “qualified” medical expenses, including deductibles, copayments, coinsurance, and prescription costs. It’s important to do your own research to determine which account is best for your specific needs, whether you are a business owner or employee.
Both HSAs & FSAs
- Offer tax benefits
- Have annual contribution limits
- Employees cannot have both an HSA and an FSA, except for limited-purpose FSAs restricted to dental and vision services
- Are a nice perk for businesses to offer to potential hires when discussing benefit packages
- Businesses do not pay payroll taxes on employees’ pre-tax contributions
- Unused funds from an HSA continue to roll over from one year to the next
- Require a High-Deductible Healthcare Plan (HDHP) for account qualification
- Contributions are tax-deductible (pre-tax if done through payroll deduction)
- Employers can contribute to employees’ HSA accounts
- Do not allow spending more than the available funds in an employee’s account, but you can file for reimbursement later when funds are available
- For Businesses, your contribution to employee HSAs can be used as a business income tax deduction
- Owners fund an HSA through pre-tax withdrawals from employee paychecks
- Prior to age 65, HSA funds may only be used for qualified medical expenses without paying income tax, plus a 20% penalty
- For age 65 and above, HSA funds used for expenses other than qualified medical expenses are income taxable, but the 20% penalty no longer applies
- Participating employees’ entire annual FSA contribution is available for use at the start of the plan year or after the employee’s first contribution is received. Employees must contribute the amount needed to cover all expenses by the end of the year.
- Any funds left unused at the end of an employee’s plan year will be lost unless the plan has a grace period or rollover feature.
- Reduces your taxable wages if you fund it with pre-tax dollars.
- Are only available through a benefits package from an employer; individuals cannot purchase this type of account privately.
- Dependent Care FSAs are available for expenses related to children under the age of 13 including daycare, preschool, summer camps, and nonemployer-sponsored before or after school programs.
*Consult your tax advisor for how an HSA or FSA might benefit you, depending on your particular tax situation.