Posted in Offering health benefits

FSA or HSA? Pick the Best Plan for Your Team with This Cheat Sheet

FSA or HSA? It’s the age-old question that’s whispered inside every office in every city in every state at least once a year. While the two acronyms may sound like the exact same thing, that little F or H changes everything. FSAs and HSAs are both tax-advantaged medical savings accounts, meaning that they help you and your employees save serious money on health-related expenses. Many companies pour them into their benefits packages to help their team better budget their health needs throughout the year.

But should you offer them too? And if so, which one should you and your employees pick? We’ve got some answers.

In this article, we’ll show you the FSA and HSA way. You’ll learn how each plan stacks up against each other so you can select the best option for your team.

Let’s get down to business. What’s an FSA?

An FSA stands for flexible spending account, and it’s a type of account that lets your team set aside some of their pre-tax earnings to pay for eligible medical expenses. There are various types of FSAs out there, but here we’re talking about the most common one—a health FSA.

An FSA lowers your team’s taxable income because employees can pay for approved medical expenses without having to pay taxes on them. This aspect is huge. It works by deducting money from your team’s paychecks and then adding it to their FSA accounts. This decreases their total income tax bill for the year.

While employees choose how much money they want to add to their accounts for the year, an FSA account is owned by you, the employer. The most someone can contribute to their FSA in 2017 is $2,600.

Typically FSAs are considered a use-it-or-lose-it benefit, meaning that any money your employee doesn’t use during the year isn’t carried over to the following year. However, there are some things you can do to help your employees get the most out of their FSA contributions.

  • Introduce a grace period. This gives employees an extra two and a half months to spend their funds.
  • Give your team the ability to carry over money. Doing so allows employees to carry over up to $500 of unused funds into the new year.

Whatever kind of FSA you decide to implement, it’s important to stress to your team the importance of contributing an amount that they think they’ll realistically spend in a year.

Does your team have extra money leftover? Here are some ideas on where they can spend their FSA money before it vanishes.

How funding works

If you offer a health FSA, there is a risk you’ll have to shoulder. That’s because you, as the employer, will “pre-fund” the employees’ entire FSA election. Or in other words, you front the money for the whole year.

Let’s say an employee uses the full $2,600 at the beginning of the year and then you terminate them or they leave voluntarily. If that happens, you’ll lose the difference between what you pre-funded and what they contributed before they left.

What’s the deal with dependent care FSAs?

Not to worry. A dependent care FSA is just another type of FSA you can offer your team. It’s used to pay for expenses for your employees’ dependents, such as child care, elder care, after-school care, summer camp, and a few other expenses. You do not fund the dependent care FSA in advance; your employee can only enjoy tax-free spending on what they’ve already contributed from their paycheck.

If you decide to offer a dependent care FSA, the contribution limit for families is $5,000 total. So both parents can’t have an FSA if the amount exceeds $5,000.

Keep in mind that your employees can still have a regular health FSA with a dependent care FSA. The thing is, they can only use their dependent care FSA on expenses related to care for their dependents. Makes sense, right?

Okay. Now what exactly is an HSA?

An HSA stands for a health savings account, and it sort of works like a retirement account. It’s simply another type of medical savings account that employees contribute to from each paycheck. The main thing to know here is that only folks with high-deductible health plans, or HDHPs for short, are allowed to have an HSA. What’s that, you ask? HDHPs have lower premiums, while the deductible (or amount you pay before insurance kicks in) is higher.

Similar to FSAs, HSAs are designed to help your team set aside a portion of their pre-tax earnings to pay for eligible medical expenses. However unlike an FSA, HSAs are owned by employees themselves. Therefore, they can take the account with them from job to job. The HSA contribution limit in 2017 is $3,400 for an individual, while the limit for families is $6,750. Contributions to an HSA roll over year to year, unlike a typical FSA.

Having trouble remembering it all? Here’s a snapshot of the two kinds of plans:

FSAs and HSAs at a glance

FSA HSA
Employee eligibility
  • Employees are eligible unless they have an HSA.
  • If they have an HSA, they’re only eligible for a limited purpose FSA. This version mainly includes dental and vision costs.
  • Employees with HDHPs are eligible for an HSA.
2017 Contribution Limit
  • Individual: $2,600
  • Family (if you have a dependent care FSA): $5,000
  • Individual: $3,400
  • Family: $6,750
Account ownership
  • Employers own these accounts. So if an employee switches jobs, they can’t take the account with them.
  • Employees own these accounts and can take them wherever they go.
Accessibility to funds
  • It’s use-it-or-lose it, unless you include a grace period or carryover in your plan.
  • Extra money can roll over to the following year.
Flexibility with contribution amounts
  • Employees can only set a contribution amount during open enrollment and/or a qualifying life event.
  • Employees can change their contribution every pay period.
Employer-matched contributions
  • Yep!
  • Yep!

I’m feeling good about the differences. But which one should I choose for my team?

First, ask yourself this question:

  • Do you offer a high-deductible health plan?
  • If you do, you could offer an both an HSA and FSA or an FSA or HSA only.
  • If you don’t offer an HDHP, then your only option is an FSA. Easy as that.
What if I have an HDHP with an HSA and another type of health insurance plan?

Beyond it being quite a mouthful, it also means you can offer an FSA for those employees who don’t choose the HDHP route. For the ones who do choose an HDHP, they could still take an FSA for their dental and vision expenses in the form of a limited purpose FSA.

If you’re offering both, you may want to give your employees a bit more guidance. Giving your team a description of who an FSA or HSA is a better fit for will inch them closer to their decision. For example, you can ask your team to quiz themselves on where they think they’ll be in the coming year. Do they fit in either bucket below?

The person who is going to have a lot of medical expenses this year

Let’s say your employee is pregnant, needs to have their wisdom teeth taken out, or has some other expected medical procedure. An FSA may be a good option because they can immediately access the money when they need it. Just remember that an HSA allows your employee to contribute more money to it than an FSA allows.

The person who doesn’t know what life will bring this year

An HSA might be a better fit for this employee. Since folks can only access their HSA money as they contribute to it, it makes more sense to go this route for the employee who isn’t expecting a lot of immediate medical expenses.

How do I actually set up an FSA or HSA?

Once you have an idea of which account is right for you and your team, give your health insurance broker a ring. Let them know which one you’re thinking about setting up, along with any special features you want to layer on top. Your broker will walk you through the accounts available to you based on your current health insurance plan, in addition to all costs associated with it.

Now you can feel a lot calmer about the good ol’ FSA or HSA debate. With this breakdown, you’ll be able to pinpoint the plan that works best for your company, while empowering your team to do what makes the most sense for them too.

 

Please keep in mind that this article is not tax advice. Consult with your tax or benefits advisor to help you make the right choice for your specific business.