Employees value healthcare benefits more than nearly any other type of fringe benefit that employers offer.
Although small business health insurance plans are arguably the most essential healthcare benefit an employer can offer, it's also useful to give employees choices that can let them save money toward their healthcare expenses in a way that also gives them a tax break.
There are two primary ways that small businesses can offer plans to let their workers save money toward their healthcare costs. Health savings accounts and flexible spending accounts are both related to healthcare, and although they have a lot in common, they also have some key differences that any employer needs to understand before offering one or both to their employees.
What is a health savings account?
Health savings accounts are tax-favored accounts that employees can set up either through their employers or directly with a financial institution. Employees can use the money that goes into these accounts to pay for certain medical expenses or to reimburse them for the money they spend on those medical expenses.
The primary idea behind health savings accounts is that they're intended to help employees set aside enough money to cover the portion of their healthcare costs that they're required to pay out of their own pockets. Accordingly, in order to be eligible to contribute to an HSA, a worker has to have health insurance coverage that qualifies as what's known as a high-deductible health plan.
These high-deductible health plans, or HDHPs for short, have higher annual deductibles than more comprehensive health insurance plans, and they also have a maximum limit on the deductible and other out-of-pocket medical expenses that you have to pay.
For 2020, the minimum deductible necessary for a policy to qualify as an HDHP is $1,400 for individual coverage or $2,800 for family coverage. Maximum out-of-pocket amounts are $6,900 and $13,800, respectively, for individual or family policies.
Employers that set up HSAs are also allowed to make contributions toward their employees' accounts. Many employers do so in order to provide incentives for workers to choose HDHPs over more comprehensive health insurance plans, because HDHPs typically have lower premiums and are therefore more cost-effective for employers to offer.
It can also affect small business taxes because employer contributions are typically tax-deductible for the business.
What is a flexible spending account?
Flexible spending accounts are tax-favored accounts that employers make available to their employees. Employees can divert money from their paychecks into an FSA each year to go toward covering qualified healthcare costs.
The primary benefit of FSAs is that the money that employees deposit into their accounts comes from their pretax income, and they don't have to pay income tax, Social Security payroll tax, or Medicare payroll tax on the amounts that go into the flexible spending account.
In 2018, employees could make contributions to FSAs for healthcare purposes of up to $2,750. As long as the employer provides a flex account framework, employees don't have to have any particular type of health insurance plan in order to qualify for an FSA.
What’s the difference between an HSA and FSA?
From an employer's standpoint, both health savings accounts and flexible spending accounts can be valuable benefits for their employees. However, there are some key differences that could help you make a better decision about which one will fit better with your company.
In particular, you should take into account the following considerations in deciding whether to go with an HSA or an FSA for your business.
|Eligible health insurance plan||Requires HDHP||Any insurance plan|
|Ownership of account||Employee owns||Employer owns|
|Ability to carry over balance||Unlimited||Limited or none|
HSA vs. FSA: What business owners need to know
What type of health insurance plan do you make available to your workers?
If you offer only comprehensive health insurance that has relatively low deductibles, then there's little value in offering a health savings account along with it. That's because if the insurance you provide doesn't qualify as a high deductible health plan, then your employees won't be allowed to contribute to an HSA even if you make one available to them.
By contrast, flexible spending accounts are allowed regardless of what type of health insurance plan you offer, so they can be a perfect complement for an employer offering comprehensive health insurance.
On the other hand, if you do want to offer an HDHP option, then making an HSA available can be a great way to entice employees to choose an HDHP. That typically benefits the employer, because the monthly premium costs that employers have to pay for high-deductible health insurance tend to be a lot cheaper.
Often, you can even make additional employer contributions to an employee HSA and still end up ahead. If you have both HDHP and regular insurance, then you can have both an HSA and an FSA.
Who owns the account?
HSAs and FSAs look a lot alike, but they're different in terms of who owns the account. With an HSA, the employee owns the account. That's the case regardless of whether the employee is the only one making contributions to the HSA or the employer makes additional contributions.
If the employee retires or leaves service, then the full HSA balance belongs to the employee, regardless of how long the employee has worked there.
FSAs work a lot differently. Even though the employee can elect to make contributions to the account, FSA balances are owned by the employer. If the employee leaves while there's still a balance in the FSA, then the employee forfeits that remaining money, which then goes back to the employer.
Can employees carry over balances?
HSAs and FSAs also differ in terms of the flexibility the employees have in using the money. With an HSA, once money goes into the account, it belongs to the employee. The employee can carry forward any unused money to future years, and there's no deadline by which the employee has to spend the money.
By contrast, workers typically have to spend all of their FSA money for a given year or else they lose it. Some plans offer workers an extra couple of months into the following year to let them use up their FSA money, while other plans have provisions that allow workers to carry up to $500 forward into the following year.
However, employers aren't required to include either of those provisions and so managing FSAs can be a little cleaner than the long-term carryforwards that HSAs allow.
Make your employees happy with HSAs and FSAs
Whether you pick health savings accounts or flexible spending accounts, offering healthcare-related benefits can be a great way to get employees to come on board and stay with your company.
By fitting together the rest of your benefits package with an HSA or FSA as part of your strategic human resource management, you can help your employees make the most of the perks you offer them.