When it comes to employee healthcare benefits, there are many options out there. But which one is best for your business? FSAs and HSAs, are both popular choices, but each has its own advantages and disadvantages, so it’s important to understand the difference before choosing one for your company.
FSAs & HSAs What Do They Mean?
The first step in understanding which medical savings account is best for your business is to understand the key differences between the three common types. Let’s look at each a little closer.
Health Savings Account: HSA
HSAs are a benefit that employers can offer as a way for employees to set aside tax-advantaged medical savings for copays, deductibles, and other medical expenses.
An HSA is like a checking account.
Employees must track their contributions,
expenses, and reimbursements.
The caveat: Only individuals who are covered by a high-deductible health plan (HDHP), are not enrolled in Medicare, and do not qualify as a tax dependent of someone else are eligible for an HSA.
Contributions are made into the HSA account by the employee and/or the employer up to a specific amount each year.
Who is an HSA Suitable For?
HSAs are a good option for healthy employees who generally receive medical care for annual checkups and have infrequent medical needs.
Whatever amount employees save in their HSAs, they can keep, grow tax-free, and then withdraw from, even years later.
Who Owns the Account?
HSAs are owned by the employee and follow them when they resign, are terminated, or retire.
What Expenses are Covered by an HSA?
An HSA covers qualified medical expenses including most medical care such as dental, vision, and eligible over-the-counter drugs. A few examples include:
- Office visit copays
- Health insurance deductibles
- Dental expenses
- Vision care
- Prescription drugs
- Imaging (X-rays, MRIs)
- And more
Using an HSA to Your Advantage
A high-deductible health plan with an HSA can help save your company money because high-deductible plan premiums are lower than most traditional plans.
There are tax benefits for employers as well. Reducing your employee’s taxable income decreases your tax liability. The lower your employee’s FICA tax liability, the less you will have to pay.
Flexible Spending Account: FSA
An FSA is an employer-based program that uses pretax funds to cover qualified medical costs before federal, state, or local withholding taxes are applied to the amount withheld from the employee’s paycheck.
Employers and employees can both contribute to the FSA, but there is a cap on the amount that can be contributed to an FSA each year.
Who is an FSA Best For?
For employees who anticipate having out-of-pocket medical care costs and want to cover those costs with pretax money, a medical FSA is a terrific option. Also, employees who chose to contribute to a medical FSA for the tax year have immediate access to their whole chosen contribution amount, making it an excellent alternative for people who have medical bills to pay for early in the year.
Who Owns the Account?
The employer owns the FSA account. Once employment is terminated, employees are generally no longer eligible to participate in the medical FSA and will forfeit any unreimbursed contributions.
Depending on the employer’s election, unused contributions are either forfeited or a portion can be carried into the next plan year.
What Expenses are Covered by an FSA?
An FSA covers many of the same qualified medical and dental expenses that are covered by an HSA, except for Medicare premiums.
Using an FSA to Your Advantage
A medical FSA allows employees to make pre-tax contributions, which lowers their taxable income and tax obligations. Companies are exempt from paying the employer’s share of the Social Security tax on the FSA contributions made by employees.
Learn More > Our Guide to Employee Benefits
Partner with a PEO for Employee Healthcare Benefits
If you’re looking for a way to provide your employees with top-notch healthcare benefits, partnering with a PEO like Vested HR may be the right solution for you. We can help you navigate the complex world of healthcare reform and compliance, and offer a variety of health insurance options for your employees.
Working with a Vested HR can also help you manage costs by giving you access to our group purchasing power. And, because we handle all the administrative tasks associated with employee benefits, you’ll have more time to focus on running your growing business.