HSA vs FSA: Which is Better to Have in an Employee Benefits Package?

As an employer, offering a comprehensive employee benefits package is an important part of ensuring that you attract and retain top talent. But it  can be difficult to know which policies and products  are best for your organization given many different types of healthcare accounts available. 

Two popular options are the flexible spending account (FSA) and the health savings account (HSA). While they both offer advantages to employees enrolled in them, there are some key differences between the two that employers should be aware of when considering what type of account to include in their benefits package. 

Understanding these nuances will help HR leaders make an informed decision about which account will best contribute to crafting an attractive employee benefits package. 

What is an HSA?

An HSA is a tax-advantaged account designed to help individuals save for qualified medical expenses. It's like a personal savings account, but the funds are earmarked for healthcare purposes. The alure of an HSA lies in its triple tax benefits:

• Contributions are tax-deductible.
• The money grows tax-free.
• Withdrawals for eligible expenses are tax-free too.

Benefits of HSAs for Employees

In addition to offering employees tax savings, HSAs offer many other benefits including: 

• Flexibility: Employees can use their HSA funds for various eligible medical expenses, including doctor visits, prescription medications, dental care, and even some over-the-counter products.
• Ownership: The HSA belongs to the employee, which means they can take it with them if they change jobs, retire, or switch to another insurance plan.
• Long-term savings: There's no "use it or lose it" rule with HSAs. The funds roll over yearly, allowing employees to save for future healthcare needs or even use the HSA as a supplemental retirement account.
• Investment opportunities: Many HSAs offer investment options, enabling employees to grow their funds even more over time.
• Contribution limits: Employees can adjust their HSA contributions throughout the year, allowing them to adapt to changing financial circumstances or healthcare needs.
• Employer contributions: In many cases, organizations contribute to employee HSAs, though the contribution amounts vary from employer to employer.
• Financial safety net: An HSA provides employees with a cushion for unexpected medical expenses, helping to reduce the stress associated with unforeseen healthcare costs.

Can Anyone Open an HSA?

According to the IRS, HSAs are only available to those enrolled in a High Deductible Health Plan (HDHP). An HDHP typically has lower monthly premiums and higher deductibles, making it suitable for employees who want more control over their healthcare spending.

What is an FSA?

FSAs aim to cover out-of-pocket medical expenses just like HSAs, but they work more like credit accounts. Employees can use the credit amount for eligible expenses immediately but must reimburse the money before the year ends. The IRS sets regulations for FSA use and provides special tax advantages to individuals who comply with these rules.

Benefits of FSA for Employees

Though similar to HSA benefits, FSAs have a few advantages unique to it including: 

• Tax savings: Contributions are tax-free. You can use the maximum amount of money the IRS allows on covered expenses as soon as you open the account, regardless of any previous pre-tax contributions.
• Flexibility: Employees can use FSA funds for a wide range of eligible medical expenses, including doctor visits, prescription medications, dental care, vision expenses, and some even help with childcare costs.
• Immediate access: Unlike HSAs, the total annual FSA contribution is available at the beginning of the plan year, allowing employees to cover large medical expenses early on.
• Easy to use: Many FSAs offer debit cards for easy access to funds, making the reimbursement process more convenient for employees.
• Employer contributions: In some cases, employers may choose to contribute to their employees' FSAs, which does not reduce what the employee is allowed to contribute.

Can Anyone Open an FSA?

Unlike HSAs, FSAs are not tied to a specific type of health insurance plan. Employees can participate in an FSA if their employer offers one. However, it's important to note that self-employed individuals and business owners are not eligible to open an FSA for themselves.

Comparing HSAs vs FSAs for Your Business

When deciding between offering HSAs and FSAs to your employees, consider the unique benefits each option brings to your business. Both types of accounts provide tax advantages and help employees manage healthcare expenses, but key differences can impact your organization.

HSAs offer employees more flexibility and long-term benefits as the funds roll over each year. Some HSAs can even be used as supplemental retirement accounts. This feature can make HSAs an attractive benefit for employee recruitment and retention. Since HSAs are only available to those enrolled in an HDHP, offering this option can also reduce health insurance premiums for employers and employees.

On the other hand, FSAs can be offered to a broader range of employees, as they are not tied to a specific type of health insurance plan. This makes FSAs more inclusive and accessible for your workforce. FSAs can also encourage employees to be more proactive about their healthcare needs since they’ll forfeit any unused funds at the plan year's end due to the "use it or lose it" rule. By offering an FSA, you can potentially lower your payroll taxes, as the employee contributions to the FSA are exempt from Social Security and Medicare taxes.

Which Should You Offer Your Employees?

Ultimately, choosing between an HSA and an FSA depends on your organization's goals, the health insurance plans you offer, and the specific needs of your employees. When deciding which accounts to offer, you may find it helpful to ask yourself the following questions:

• Does your company provide an HDHP? Keep in mind that employees who don't enroll in an HDHP are not HSA-eligible. If an HDHP is not an option, you can offer employees an FSA instead.
• Do you think your insurance costs are too high? Providing an HSA to your employees may encourage them to choose the less expensive plan, resulting in cost savings for you.
• Is your turnover rate high? HSAs are owned by the employee, while FSAs are owned by the employer. If an employee leaves without using the balance of their FSA, the money is forfeited to the company. However, if the FSA money has been used but not fully paid back, the employee would owe the remaining amount upon termination. This policy may encourage employees to remain with the company longer.
• Are you required to offer health insurance? If your business is exempt from providing health insurance, you wouldn't be able to offer an HSA, but you could still offer an FSA.

Robust Supports For Your Employees' Health and Wellbeing

Creating a comprehensive employee benefits package is time-consuming and complex. Add on rising healthcare costs, and it is more difficult than ever to provide meaningful benefits that give employees access to the best wellness services at an affordable rate. 

Medical savings accounts are a great way to help your employees take care of their health and wellbeing. As is any investment in employee wellbeing, as improving workforce wellness helps reduce absenteeism, lower health care costs, and boost employee engagement. 

Help employees take wellbeing into their own hands with Wellhub’ flexible wellness platform. Our customizable subscription provides access to thousands of fitness centers and apps that provide everything from yoga classes to nutrition counseling - all tailored to fit your company's needs. 

Connect with a Wellhub wellbeing specialist today!

References 

• Health Savings Accounts and Other Tax-Favored Health Plans. (2022). IRS. Retrieved June 8, 2023 from https://www.irs.gov/pub/irs-pdf/p969.pdf.
• Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans. IRS. Retrieved June 8, 2023 from https://www.irs.gov/publications/p969#en_US_2022_publink1000204030.