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Insurance offered through OnPay Insurance Agency, LLC (CA License #0L29422)
Updated: December 5, 2022
Healthcare spending is expected to jump an average of 5.4% per year through 2028 when spending is projected to reach $6.2 trillion, according to the Centers for Medicare & Medicaid Services. Those expenses are just one of the reasons why robust health insurance benefits can be a key differentiator for employees who may be weighing multiple job offers.
If your company is considering adding to its benefits program, Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are a great way to help employees better cover medical-related expenses — and encourage top talent to take a closer look at your company during their job searches.
Here’s an in-depth look at how each plan works, why your small business should consider offering these types of plans, and a few tips to help you decide which plan is the best choice for your company’s needs.
FSAs — or flexible spending accounts — allow employees to set aside a portion of their pre-tax wages to pay for qualified expenses. At the same time, FSA contributions lower an employees’ taxable income, as well as the FICA taxes — and Medicare taxes — you’re responsible for as the employer. In other words, establishing FSA programs can be a win-win. While there are a few different types of FSA plans out there, the most common is the Health Care FSA (HCFSA).
A Health Care FSA is used to pay for eligible medical-related expenses such as pharmacy, dental, and vision fees, as defined in Publication 502 from the Internal Revenue Service (IRS). Employees are able to choose how much they want to contribute, up to a maximum of $2,850 for 2022 (up from $2,750 in 2021). As the employer, you are the owner of the account and will pre-fund the amount of the employee’s entire FSA election at the start of the year. But employees have to enroll into an FSA — some people opt not to contribute.
When establishing HCFSAs, it’s important to encourage employees to contribute only the amount they think they will spend in a given year because — in most cases — money in this type of account does not roll over into the next calendar year, if it hasn’t been spent. Employees should view the money in the account as “use it or lose it” cash. Although, there’s a few ways to soften this limitation:
While you do have the option of implementing a grace period or allowing carry-over, you cannot do both. Additionally, it’s important to note that you’re not required to offer either option. If you do choose to add one of these options to your plan, give it some thought — and consider polling your employees — to determine which one may be a better fit.
It’s also a good idea to educate employees about some of the alternative ways the money in an HCFSA can be spent to help prevent the funds from going to waste; there’s many items employees can purchase with proper planning. For example, employees can use their HCFSA dollars to cover copays and coinsurance — or expenses that an employee may not have insurance to cover, such as vision care, glasses, or contact lenses.
Additional eligible ways to spend the funds can include:
Keep in mind that there is some risk to the employer when offering an FSA. For example, an employee can elect to contribute the full $2,850 to their FSA account. However, should they choose to spend the full amount in the first two months of the year and then leave your company, you would lose the difference between what you pre-funded and the amount of money the employee contributed before leaving. In such cases, the employee is not responsible for making contributions after leaving the job.
On the flipside, there is a risk to employees as well. Any FSA funds that haven’t been used by the end of the plan year are defaulted to the employer and are no longer available to the employee. This can result in a serious blow to employee morale. Communication is key to avoid such challenges: an employer’s best course of action is to communicate regularly, reminding employees to use their available funds as the year comes to an end.
A dependent care FSA covers the costs of preschool, summer day camp, before or after school programs, and child or adult daycare.
These are quite common and work similarly to an individual FSA plan, but with a higher contribution limit to cover your employees’ dependents. The contribution limit for a dependent care FSA plan is $5,000 per family in 2022 (unchanged from 2021) and $2,500 if married, filing separately. This means if you offer a dependent care FSA, both parents cannot have this plan if the total contributions add up to more than $5,000. Employees can have both a regular FSA and a dependent FSA, but can only use the funds in the dependent plan to cover expenses to care for their dependents.
Similar to FSAs, an HSA will lower your employees’ taxable income. As yet another type of medical savings bank account, your employees are able to contribute money from each paycheck to an HSA with pre-tax dollars. And again, this process lowers the amount of FICA taxes and Medicare you are responsible for matching as the employer. Unlike an FSA account, however, HSAs are owned completely by the employee, so they can be transferred from one job to another.
The major caveat to having an HSA account is it can only be obtained by people who have an HSA-qualified medical plan. HSA-qualified medical plans are insurance plans where the premiums (monthly costs) are lower, the deductibles (the amount participant’s pay before insurance kicks in) are higher. A plan is considered an HSA-qualified plan if the employee’s deductible is at least $1,650 for individual coverage or $2,800 for family coverage.
In 2022, the contribution limit for HSA bank accounts is $3,650 for an individual, while the limit for families is $7,300. And unlike FSA plans, funds not spent in an HSA plan do carry over into the following year. In addition, the funds that are carried over will not count towards the contribution limit in the new year.
For companies that do not offer high deductible health plans, only one of the accounts we’ve talked about in this article can actually be offered to your employees. That’s the FSA or flexible spending account.
But, if you do offer a high deductible health plan, you have the option of also offering employees an HSA or HSA along with what’s known as a Limited Purpose Flexible Spending Account or LPFSA. If you’re not familiar with a LPFSA, they are pre-tax contribution accounts that are designed to work in conjunction with high deductible health plans.
Employees can use the money contributed to LPFSAs to pay for out-of-pocket expenses for eligible dental, vision care and even post-deductible medical costs. In other words, an LPFSA helps employees offset the high deductible of their insurance plan. The money can be used to pay for eligible expenses incurred by the employee, their spouse and qualified dependents.
We’ve covered a lot of ground. To make it easier to differentiate the different types of accounts, here’s a quick rundown of the key points:
|Eligibility||All employees are eligible for an FSA account unless they have an HSA account. In this case, they are only eligible for a Limited Purpose FSA.||Employees with an HSA qualified plan are eligible for an HSA bank account.|
|Account ownership||FSAs are owned by the employer.||HSAs are owned by the employee.|
As of 2022
|Individual (medical expenses): $2,850
Family (for a dependent care FSA): $5,000
|Access to funds||An employee has access to their full FSA election at the beginning of the year, regardless of how much they have contributed thus far.||An employee only has access to the amount they have contributed to the account thus far.|
|Rollover rules||Use-it-or-lose-it, unless you implement a grace period or carry-over in your plan.||Any funds not spent are carried over to subsequent years, and any funds carried over do not count towards the annual contribution limit.|
|Flexibility with contributions||Contribution amounts must be determined at the beginning of the year. Employees only have the option to change their contribution amount in the event of a family status change such as marriage, divorce, or the addition of a child; examples of qualified events.||Employees can change their contribution amount whenever they see fit, as long as it does not exceed the contribution limit.|
Which option is best for your company?
When deciding, it’s best to consider the needs of your employees. For employees who know they will have medical expenses to cover in the coming year, an FSA allows for immediate access to the money. In situations where employees can expect higher medical expenses such as pregnancy or a scheduled medical procedure, having an FSA can be very beneficial.
On the other hand, an HSA plan is more appropriate for employees who may not know what to expect when it comes to medical expenses in the coming year. Because they can only access the money in the account as they contribute, it may make more sense to choose an HSA for employees who don’t quite know how much their medical expenses will cost.
If you’re still not sure which option is best for your employees, consult with your insurance broker. They will go over the options, provide suggestions, and outline the costs to help you make a more informed decision.
This article is for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.