This article has been updated to reflect 2019 rates.
There are many benefits you can choose to offer your employees. Flexible spending accounts (FSA) and health savings accounts (HSA) are both great healthcare plans that reduce an employee’s income tax liability and let them pay for medically-related expenses. It’s important for employees and employers to understand the difference between FSA vs. HSA.
What are FSA and HSA plans?
FSA and HSA plans are like personal savings accounts. However, the funds in the accounts can only be used for qualifying medical expenses.
The two plans work similarly. An employee determines the amount they want to contribute to their account. Because the funds are deposited into the account on a pre-tax basis, employees reduce their tax liability.
You might choose to offer both an FSA and HSA, depending on the health insurance plan your employees have. Employers are not required to contribute to an employee’s FSA or HSA plan, but you can if you want.
What can funds be used for?
Account holders, their spouses, and dependents use the funds in the holder’s plan to pay for qualifying medical expenses. Regardless of if the employee has an FSA or HSA, the following are eligible expenses:
Copays or deductibles
Qualifying prescriptions (including insulin)
Certain medical equipment
After an employee pays for an eligible expense, they can receive distributions from their HSA or FSA plan.
For a full list of medical expenses account holders can use their FSA or HSA funds on, view the IRS’s Publication 502, Medical and Dental Expenses.
What’s the difference between HSA and FSA?
Though there are many similarities between the two plans, there are significant differences between an HSA vs. FSA.
Here are some common questions about FSA versus HSA plans:
What makes the employee eligible to contribute?
How much can the employee contribute to their account?
Who owns the account?
When can an employee access their account funds?
Can employees rollover funds in their accounts from year-to-year?
What proof does an employee need that funds were spent on eligible expenses?
Can an employee change contribution amounts throughout the year?
Find out the answers to these questions in the chart below. Using this chart, you can compare HSA vs. FSA plans to help you decide which is the best option for your small business and employees.
Eligibility to Contribute
You must establish an FSA plan at your small business in order for employees to contribute. You design the plan. Employees can open an FSA regardless of if they have a high deductible health plan (HDHP) or not. Self-employed individuals cannot open an account.
Employees are eligible only if they have a high deductible health plan (HDHP). The deductible must be at least $1,350 (self-only coverage) or $2,700 (family coverage). And, the annual out-of-pocket expenses can’t exceed $6,750 (self-only coverage) or $13,500 (family coverage). Self-employed individuals can contribute.
Annual Employee Contribution Limits
For 2019, employees can contribute up to $2,700 per year to their account.
In 2019, employees can contribute up to $3,500 if they have self-only coverage and $7,000 if they have family coverage. If the employee is 55 years old or older, they can contribute an additional $1,000 to their plan.
An FSA is owned by the employer. You must establish an FSA at your business for employees to open accounts. Unused funds belong to you, not the employee.
Essentially, an HSA is a bank account owned by the individual who set it up. Though you can help in the process, the account is the employee’s.
Access to Money
An employee has complete access to their annual election at any time, regardless of if they have contributed that amount yet or not.
An employee only has access to what has actually been deposited into their HSA account.
You choose whether an employee can keep their unused funds or not. There are three options: 1.FSA forfeiture: Employee forfeits money, and you get to keep it. 2. Grace period: Employee has a 2.5 month grace period after the plan year ends to use on expenses. Remaining money after the grace period is yours.3. Carryover: Employees can add up to $500 of unused funds to next year’s plan (in addition to contribution limit). You decide the carryover limit, and any funds over the limit are yours.
Funds do not expire from year-to-year. Rollover money is in addition to the contribution limits.
To receive distributions, the employee needs to provide one written statement from an independent third party that details their expense and amount, as well as another written statement that says the expense isn’t covered by a different plan. Account holders do not need to report FSA contributions on their tax forms.
In order to receive distributions, the individual must keep records. The account holder must report their distribution on Form 8889, Health Savings Accounts.
Option to Change Contributions
Your employee must determine their contribution amount at the beginning of the year. If the employee has a family status change (i.e., marriage, divorce, etc.), they can change their contribution amount during the year.
The account holder can change their contribution amount, as long as it does not exceed the contribution limit.
Depending on your business and the health insurance plan(s) you offer, you might only be able to offer an FSA. But, if you are eligible to offer either FSA and HSA plans, compare the two to see which is right for your business.
Advantages of FSA and HSA plans
Regardless of whether you offer an FSA or HSA plan, employees will benefit. Tax reduction and employee satisfaction are just two of the reasons you might choose to offer an FSA and/or HSA.
By reducing an employee’s taxable income, you also decrease your tax liability. As the employer, you need to make a matching contribution for FICA tax. The lower an employee’s FICA tax liability, the less you have to pay.
The majority of employees (57% according to one survey) heavily consider benefits before even accepting a job offer. When you offer an FSA or HSA plan, you can keep employees satisfied, reduce their tax liability, and reduce your employer taxes.
Thinking about offering an FSA or HSA plan to employees? Don’t get overwhelmed by your employer responsibilities. Patriot’s online payroll software lets you track your employees’ FSA and HSA deductions easily and accurately. Try it for free today!