HSA vs. Health FSA: Understanding the Difference

employees
This post is for educational purposes only. For tax or legal advice related to your specific business, be sure to consult a tax or legal professional.

For a small business, offering benefits such as a Health Savings Account (HSA) or a Health Flexible Spending Account (Health FSA) can be an attractive recruitment and retention tool for employees.

You’ve likely already done research into these benefits, but we’ll help you dive in deeper with the differences between the two, so you can decide which is best for you and your business.

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What are Health FSAs and HSAs?

Health Flexible Spending Accounts and Health Savings Accounts are similar. Both allow employees to contribute pretax funds that can be used to pay for qualified health-care expenses (medical, dental, vision) like copays and deductibles as well as certain prescriptions and equipment.

Both types of account are a win-win for employees and employers. Since the funds contributed to these accounts aren’t subject to federal income tax, FICA, or FUTA taxes, as well as most (but not all) state taxes, employees’ taxable income is lowered and so is their tax burden.
And because your employees’ taxable income is lower, your tax burden as an employer is lower as well.

Which type of account should I make available for employees?

Health FSAs and HSAs provide similar tax benefits for you and your employees. But they differ in significant ways, including eligibility, contribution limits, and account ownership, among other things.
Whether you choose to make a Health FSA or HSA available to your employees really depends on your business and how much bandwidth you have to administer a program. To make the best decision for your business — and your employees — let’s take a side-by-side look at how each one works.

Who is eligible for an HSA? Who is eligible for a Health FSA?
HSA Health FSA
Only employees covered by a high-deductible health-care plan can elect to contribute to an HSA account. For 2018, a high-deductible plan is a plan with a deductible of $1,350 for individuals and at least $2,700 for families. Any employee who meets the program’s eligibility requirements can elect to contribute to an employer’s Health FSA program, unless he or she has an HSA account. If an employee has an HSA account, they may opt in to a limited-purpose Health FSA, which will only cover out-of-pocket dental, vision, or preventive care expense on a first dollar basis.
What are the contribution limits for Health FSAs and HSAs? When can contribution elections be changed?
HSA Health FSA
If you are single, the IRS HSA contribution limit for 2018 is $3,450. For a family, the contribution limit is set at $6,900. If you’re older than the age of 55, you’re allowed to “catch up” on your savings and contribute up to $1,000 for yourself. An employee can change their monthly contribution to an HSA account during the year, as long as they don’t surpass the yearly contribution limit. The 2018 IRS contribution limit for a Health FSA is $2,650. An employee has to decide how much to contribute to their Health FSA at the start of the year. Contribution elections cannot change during the year unless an employee has a change in family status (like getting married or divorced).

All of these contributions can be made pretax via payroll.

Are employee accounts credited with earnings?
HSA Health FSA
HSA contributions are invested, and earnings are tax-deferred and credited to an employee’s account. Money contributed to a Health FSA does not earn interest.
Can contributions be forfeited?
HSA Health FSA
Amounts remaining at the end of the plan year remain in the employee’s account and are not forfeited. An HSA is tied to the employee, who owns the account and can transfer the funds if they leave their job. Most plans are “use it or lose it,” meaning any amounts remaining in the Health FSA at the end of the plan year are forfeited. Employers may choose to offer a carryover option of $500 from one year to the next, but not all do.
Who can access the money in an account?
HSA Health FSA
An employee has access to whatever the total amount of money is in the HSA account. Employees have access to their entire Health FSA annual election amount at any time, even if they have yet to actually contribute that amount from their paychecks.
Can you only use HSAs and FSAs for health-care costs?
HSA Health FSA
HSA accounts can only be used for qualified medical, vision, or dental expenses. An employer may also establish a dependent care FSA account. The maximum amount a family can contribute to a dependent care FSA in 2018 is $5,000.

Ready to administer your health-care benefits for your employees? Square Payroll supports the processing of retirement plans and other pretax deductions.

When you create a benefit, you set a deduction percentage or fixed amount to be withheld from your employee’s paycheck. Benefit deductions and contributions are automatically calculated when you run payroll, and those funds are left in your bank account for you to distribute to the applicable benefit providers. Square Payroll also determines the taxability and reporting requirements for each benefit to make sure your taxes and tax forms are accurate.

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