Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) are two ways employers can help employees better manage the cost of healthcare. They’re an employee benefit separate from medical insurance, and you cannot enroll in both types.
These accounts are designed to pay for a lengthy list of “qualified medical expenses” to alleviate or prevent physical or mental illness.
But deciding which one is right for you, or your employees, can be challenging! What’s the difference? And how can one strengthen your wellness program?
The Advantages of HSAs and FSAs
These two tax-advantaged accounts are a boon to both companies and employers. Both help individuals to put money toward health costs such as deductibles, copays, medicines, and other health expenses. Both offer tax incentives; employees can reduce their tax burden through contributions, and employers can also qualify for federal tax deductions
However, there are some key differences.
To qualify for an HSA, you must first be enrolled in a high-deductible health plan. Most employers will offer a choice: high-deductible plans make sense for people who are generally healthy, without young children.
Insurance plans are a balancing act between deductibles and premiums. The more you are willing to pay each month on your premium, usually the lower your deductible. For the insurer, a higher deductible means you are responsible for a greater amount of your initial health care costs, saving them money. For you, the benefit comes in lower monthly premiums.
As of 2018, high deductible health plans have a deductible of at least $1,350 for one person, or $2,700 for a family.
HSA Perks
Employers can put money into health savings account as part of a benefits package, but the funds are solely the employee’s. They don’t expire, so account holders don’t have to worry about a “use it or lose it” policy.
Health Savings Accounts offer a triple tax advantage:
- employee contributions are from pre-tax income
- interest earnings aren’t taxed
- you won’t pay taxes when you withdraw money for qualifying expenses
Employers can also earn a federal income tax deduction for any contributions made into an employee’s HSA.
FSA Perks
A flexible spending account works a bit differently, which is clear from the name. This account is designed to be spent on qualifying expenses for the upcoming year. Balances generally do not roll over, and you may forfeit the funds if you leave your job without using them.
One big advantage of an FSA: employees have access to the full annual amount—even money that hasn’t been deducted from their paycheck yet—on the first day of the plan year.
An FSA tends to work best for people who have regular and predictable healthcare needs, such as a family with young children. Often, they are used to close the gap between out-of-pocket costs and what is covered by a low-deductible health plan.
Used effectively, it’s almost like getting a tax-free loan to help pay for something big, like Lasik eye surgery. (Or these 20 unexpected qualifying items.)
Strengthening Your Wellness Program
Both of these accounts can be useful for managing expected health care costs, or weathering a financial surprise. But when it comes to wellness, we recommend an HSA. Try small but regular contributions to employee HSA accounts as a long-term strategy to build engagement and happiness.
One possible approach:
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- In the first year, an employer will match a percentage of HSA contributions or offer a large lump contribution (such as $500 per year)
- In year two, the employer begins to incentivize larger periodic contributions by asking employees to complete one step, such as a health risk assessment or biometric testing, in order to earn the full amount
- In year three, the employer will make the requirements more challenging, incentivizing contributions by encouraging employees to participate in a gym reimbursement program, lunch-and-learns, or a workplace wellness challenge
For our clients, we also recommend employers use an HSA contribution as a challenge prize. And in addition to charity contributions and direct deposits, we also give IncentFit users the option to contribute earned rewards directly to their HSA.
Learn more about how you can use an HSA to support retirement savings. Or schedule a call with our team to learn about using these accounts as a wellness strategy.