Attracting and retaining the best employees goes beyond competitive pay. In the modern job market, employees set out to achieve work-life balance with the help of a supportive health and benefits package. A 2018 study found that over half of employees consider their employer-sponsored health benefits when making a long-term commitment to their company. How do you design an attractive insurance package? Flexible health plans can be the key.
Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are dynamic supplements to traditional insurance plans. By setting aside pre-taxed income, employees can use these savings to cover qualifying out-of-pocket medical expenses like:
- Co-pays and co-insurance
- Qualifying prescriptions
- Dental and vision costs
- Qualifying equipment
So, what’s the difference between an FSA and an HSA? While both plans provide a place to set aside untaxed savings, they function a bit differently. The two plans follow different rules and requirements in regard to making contributions, annual rollover and qualifying expenses.
We’ll explore the difference between an HSA and FSA as well as some alternatives to these traditional plans. Overall, deciding on the best plan for you depends on things like the size of your company, the type of insurance plan it supports and your turnover rate. Understanding your options can help you design a health insurance plan that keeps your employee’s healthy and happy.
What is an HSA?
Health savings accounts, or HSAs, are tax-free medical savings accounts that pair with high-deductible health care plans (HDHP). A high deductible is currently classified at $1,350 for an individual or $2,700 for a family. High deductibles often leave the employee paying for far more medical expenses throughout the year, and HSAs cover these costs. You can remove money from an HSA for qualifying medical expenses or for non-medical expenses with a fee and income tax.
Health Savings Accounts also act as a type of long-term emergency fund. Clients open an account with a bank, credit union or insurance company with or without their employer. Even if their employer arranged the account, the account follows them if they transition to a new position. Money in an HSA rolls over from year to year if it isn’t used for medical costs. The money in some HSAs can be invested in mutual funds over time and their gains are also untaxed.
As of 2019, an employee is allowed to contribute up to $3,500 a year toward an HSA for an individual plan. A family plan’s contributions are capped at $7,000 a year.
These accounts are ideal for companies that offer HDHPs but want to supply an additional cost-saving safety net. Some programs do charge administration fees for certain balances, so it’s important to weigh options before choosing the best plan for your employees.
What is an FSA?
If you offer a traditional health insurance plan – specifically one not categorized as an HDHP – Flexible Spending Arrangements may be your best bet. Also known as Flexible Spending Accounts, FSAs allow employees to set aside pre-taxed income to cover qualifying medical expenses with a few restrictions. Contributions are federally capped at $2,650 as of 2019.
Employees set up and maintain Flexible Spending Accounts with the help of their employer. Unlike HSAs, the money and account itself do not follow them if they leave the company. When an employee needs to access their account, they must submit expenses for approval through their employer.
Money also does not necessarily roll over from year to year, though this does depend on the specific plan. Some FSAs now offer a rollover grace period. For the most part, savings must be used within the calendar year otherwise it expires. Like HSAs, medical expenses are not taxed when they pull from an FSA account.
Frequently Asked Questions about FSAs and HSAs
How do you know which supplementary account is right for your employees? Let’s go through some common questions about both types of programs to distinguish the two.
Who is eligible for the account?
HSA: Anyone with a HDHP they purchase on their own or through their employer.
FSA: Employees that purchase a non-HDHP through their employer.
Does money roll over from year to year?
FSA: Typically, it does not. Some plans feature rollover grace periods for around $500 each year.
Do plans travel with employees when they leave a company?
HSA: Yes. Employees can keep their plans from job to job and even extend their savings into retirement once they reach the age of 65.
FSA: No, an FSA is specific to the employer and funds do not follow the employee if they leave the company.
Do funds cover dental and vision expenses?
Though specific plans vary, both FSAs and HSAs generally cover a certain level of eye and dental care. In the case of FSAs, most programs consider preventative care a qualifying expense. This includes procedures that will prevent further dental disease like extractions or crowns.
Employees can also sign up for a Limited Purpose FSA specifically for dental and vision expenses such as deductibles and uncovered services. This is the one case when employees can have both an HSA and a Limited Purpose FSA.
Can employers contribute to the plan?
Employers can contribute to both FSA and HSAs, but rules differ depending on the plan itself. For example, contributions may or may not count toward the annual contribution cap. Certain HSAs must also follow a “comparability rule” that ensures all employees are treated equally no matter their pay scale.
Can contributions pay for dependents and spouses?
HSA: A client can use pre-taxed dollars from their HSA for themselves, their spouse, any claimed dependent or anyone that they could have claimed as a dependent but fits a set of specific criterium.
FSA: Yes, employees can use funds in their flexible spending accounts for spouses and for dependents that they claim on their tax returns.
Can you change your contribution amount at any time?
HSA: You can change your contribution amount at any time for most accounts.
FSA: Employees can only change their contribution level when they have a change in family or employment status or during an open enrollment period.
How do you choose the best plan for your company?
Every company and its makeup of employees is unique.
How do you know when to offer an FSA or an HSA?
In some scenarios, you can even offer both and let your employees decide. Making the best decision for your company comes down to several factors:
- The deductible for your health insurance plan or plans
- Common turnover rate
- Preferences of your employees
When to Choose an HSA
Let’s say you manage a small company of 20 employees. Turnover is relatively high, and you primarily offer entry-level positions. For the most part, your employees are in their early 20s and prefer not to pay a high monthly premium.
If you choose a plan with a high deductible, offering a supplementary Health Savings Account is most likely your best bet. Your employees can contribute pre-taxed dollars from their paychecks and use the money for copays and other qualifying out-of-pocket expenses.
Their savings will only continue to accumulate from year to year, and they can bring the full balance with them to their next job.
When to Choose an FSA
Some industries only aim to hire long-term employees. The company’s goal is to keep their dedicated employees around to grow and expand with the business. Many employees have families and vary in age and income.
An FSA pairs well with an insurance plan without a high deductible. They are also best for those looking to stick with a company in the long run. In this case, employees get to know their insurance plan and can strategize how much money to set aside into their FSA. They allocate exactly what they need and have no reason for the money to roll to the next year.
When to Offer Both
You may also choose to provide both options and guide your employees toward choosing the best package for their needs. This is an option when one of your offered insurance plans has a high deductible and the other does not. Workers may choose to pair the HDHP with an HSA or the low-deductible plan with an FSA.
Fixed Indemnity Insurance: Another Solution
Flexible Spending Arrangements and Health Saving Accounts are not the only solutions for supplemental healthcare programs. Fixed Indemnity Insurance provides a set payout to employees should they encounter specific medical costs. This is ideal for short-term employees or those looking to save money on monthly insurance premiums. Though fixed indemnity plans do not often meet the basic ACA requirements, they provide excellent additional support to those looking for a low-cost, short term solution.
For example, Flexible StaffCARE is a fixed indemnity plan ideal for companies with hourly employees with a high turnover. Businesses in the service and retail industry can offer affordable and comprehensive coverage without the fear of losing the employee after the plan kicks in. With Flexible StaffCARE, nearly 95% of costs are covered from the first day of employment.
Companies that offer these flexible plans to hourly employees find lower turnover rates and require less coverage for sick days. This dynamic solution provides an alternative to popular FSA and HSAs.
Offering an FSA or HSA supports the financial health and overall well-being of your employees. Fixed indemnity plans like Flexible StaffCARE offer tailored plans for today’s modern workforce of hourly employees. With rising health costs, health insurance is at the forefront of many employee’s minds. Top employees seek a company that provides options and solutions for investing in their health in a cost-effective way.