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HSA vs. FSA: Which Is Best for Your Company

by John Stebbins on Sep 17, 2020 6:00:00 AM

As healthcare expenses continue to increase, tax advantaged health plans can be a cost-effective way to provide competitive benefits. By incorporating these options into your benefit package, you’ll be in a better position to attract and keep great talent.

Two of the most popular tax advantaged plan types are Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). An HSA is a type of savings account that lets employees set aside money on a pre-tax basis to pay for qualified medical expenses. An FSA is an account employees can put money into to use for certain out-of-pocket healthcare costs. 

Not sure which one is best for your business? We’re here to help.

At Complete Payroll Solutions, we help employers build strategic benefit plans that increase employees’ overall compensation and make them feel valued to boost satisfaction. We’re also cost-conscious in our approach and are seeing more and more companies taking advantage of HSA and FSA services as an affordable way to offer more benefits that fit their budgets. 

Since we want to help you be able to choose which of these plans is best for your business, we’re going to provide an honest head-to-head comparison based on several categories. This article will look at how HSAs and FSAs stack up based on:

  • Qualification
  • Contributions
  • Limits
  • Balances
  • Tax Savings
  • Expenditures
  • Portability

After reading this article, you will have a good idea of how these two options compare to each other and be able to choose the option that will help you recruit and retain employees.

HSA vs. FSA Qualification

For HSAs, one of the most important things to consider is that your employees are only eligible to participate if they’re covered under a qualifying high deductible health plan (HDHP), so you’ll have to sponsor one of these plans. Employees also can’t have any other health coverage. This means that they can’t be covered by a spouse’s plan, Medicare or TRICARE. It’s important to note that employees with an HSA also can’t be claimed as a dependent on someone else’s tax return.

FSAs are offered in conjunction with your other employer-provided benefits, meaning, employees can’t get one on their own. Most employees are eligible to take part in an FSA. Unlike with an HSA, it doesn’t matter what type of health insurance plan they have – and in some cases, they don’t even need to have insurance to participate. 

HSA vs. FSA Contributions

Any eligible individual can contribute to an HSA. You as the employer can also contribute to workers’ HSAs as well. If you offer an HSA through a cafeteria plan, employees may contribute with pre-tax payroll deductions and can also contribute after tax. One of the ways that HSAs offer greater flexibility than FSAs is that employees can change the amount they contribute to their HSA at any time during the plan year. However, only funds paid in to date can be accessed.

FSAs are usually funded through voluntary salary reduction agreements with the employer. That means the employee contributes to their FSA by electing an amount to be voluntarily withheld from their pay – also known as a salary reduction agreement. Depending on how you set up your plan, you as an employer may also contribute to your employees’ FSAs.

Unlike HSAs, employees need to designate how much they want to contribute to an FSA at the beginning of the year. This amount can only be adjusted based on a change in employment or family status. Regardless of when the money is paid in, however, employees can access it at the start of the plan year.

HSA vs. FSA Limits

The amount an employee or other person can contribute to an HSA depends on the type of HDHP coverage, the employee’s age, and the date they became eligible, with limits set by the IRS. For 2020, employees with coverage for themselves only can contribute up to $3,550. Those with family HDHP coverage can contribute up to $7,100. The contribution limit for employees is increased by $1,000 at the end of the tax year for those who are 55 or older. Both employee and employer contributions count towards these annual maximum amounts. 

In the case of FSAs, the maximum amount an employee can contribute is set by the employer and subject to IRS regulations. For 2020, salary reduction contributions to a health FSA can’t be more than $2,750 a year (or any lower amount set by the plan). Unlike HSAs, employer contributions generally don’t count towards this limit.

HSA vs. FSA Balances

One of the big differences between HSAs and FSAs is how remaining balances are treated at the end of the year. With an HSA, the amounts that an employee has left over at year’s end are carried over to the next year. 

On the other hand, FSAs are what’s known as “use-it-or-lose-it” plans. That means funds that aren’t spent by the end of the plan year are generally forfeited (and returned to the employer) and can’t be rolled over, forcing employees to think about how much they expect to spend on healthcare when they enroll. However, you as an employer can design a plan to provide either a grace period or a carryover.

HSA vs. FSA Tax Savings

Both HSAs and FSAs offer tax advantages for employers. Contributions are generally excluded from an employee’s income and aren’t subject to taxes so you won’t be responsible for the employer portion of Social Security taxes on employee contributions. Plus, your contributions are tax deductible. But the plans also hold tax benefits for employees.

An HSA is one of the most tax advantaged health plans for several reasons:

  1. Employees can claim a tax deduction for contributions they, or someone else, makes to their HSA even if they don’t itemize deductions on your taxes.
  2. Contributions to an HSA made by an employer (including contributions made through a cafeteria plan) may be excluded from the employee’s gross income.
  3. The interest or other earnings grow tax free. 
  4. Distributions may be tax free if employees pay qualified medical expenses.

FSAs also provide significant tax benefits as well, including:

  1. Contributions made by the employee or employer are excluded from the employee’s gross income so employees save on employment or federal income taxes, boosting their take-home pay. 
  2. Reimbursements may be tax free if the employee uses the money to pay qualified medical expenses. 

HSA vs. FSA Expenditures

With both HSAs and FSAs, withdrawals are tax free if they’re used for qualified medical expenses. These are expenses that generally would qualify for the IRS’ medical and dental expenses deduction, which can be found in IRS Publication 502, Medical and Dental Expenses. Employees may have the option to use a debit card to pay for expenses or they may need to submit claim forms for reimbursement.

While both types of plans treat the use of funds for medical expenses the same, they differ in the ability to use the money for non-medical expenses. Specifically, FSA funds can’t be used for non-medical expenses. However, HSA funds can be, but the money will be taxable and subject to a 20% penalty for employees under 65 (those over 65 will still have to pay income tax on distributions for non-medical expenses).

HSA vs. FSA Portability

An HSA is an employee-owned savings account and, in that sense, is “portable.” All funds, including those contributed by an employer, stay with workers even if they change employers or leave the workforce.

Employers, on the other hand, are the ones who own FSAs. They can’t be maintained when an employee no longer works for you so they’ll lose any unspent funds in their FSA when they leave.

Check Out Additional Resources for Understanding the Difference Between HSAs vs. FSAs

Whether you choose to offer an HSA or FSA, you’ll lower employees’ tax liability while enhancing their satisfaction with your benefit offerings. And you’ll reduce your taxes as well. 

Since HSAs and FSAs have their advantages and disadvantages, it’s important to understand what may make one better suited for your organization.

HSAs work well if  you:

  • Offer a qualified high deductible health plan
  • Want to help employees save for the long-term as well, including in retirement
  • Like the idea of giving employees more flexibility in how they use their funds

FSAs typically fit those who:

  • Want to offer an account to any employee, regardless of what, if any, health plan they choose 
  • Look at the plans as a way to encourage retention
  • Are willing to give employees complete access to their annual election even if it’s not funded

At Complete Payroll Solutions, we offer both HSAs and FSAs. No matter which option you think is the right choice for you, we’re here to answer any questions you have. Visit our website to learn how we can help.


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