HSA vs FSA: Which is Best for Your Employees?

It’s no secret, healthcare insurance plans don’t cover everything. And it’s enough of a problem to cause real concern. In fact, 57% of employees are more likely to ignore a medical problem due to fear that the cost will be more than they can afford. Unfortunately, the cost of healthcare isn’t getting any cheaper. Out-of-pocket expenses are expected to increase 6%+ this year (PwC), which adds to your employees’ financial stress and distraction. Fortunately, there is something employers can do. As employees look for ways to prepare for the unexpected, offering HSAs and FSAs might be the best way to help. To get the full scoop on HSAs and FSAs, we enlisted the help from our partners, Ryan Crapser and Christine Turk of Clarity Benefits Solutions for a webinar on the hidden secrets of HSAs and FSAs. We provided you with some of the highlights here.

What are HSAs and FSAs?

Flexible spending accounts (FSA) and healthcare saving accounts (HSA) are pre-tax benefits that aid employees in saving and paying for qualifying medical costs. FSAs are typically funded solely by the employee and funds must be used by December 31 (or a designated date). HSAs can be funded by employees, employers, or both and are carried over year after year.

These benefits can be a competitive advantage for employers as employees favor those who help them prepare for expected and unexpected health costs. It pays to care about your employees’ financial wellbeing.

What is an HSA? How are HSAs used?

An HSA is healthcare savings account owned by an individual. Employees deduct a portion of their paycheck, before taxes, and the money is set aside for medical expenses, or investments (if unused) to help prepare for retirement. Employers can also contribute tax-free to contribute to their employees’ HSAs. The interest earned is tax-free, and they offer tax-free withdrawals for qualified medical expenses.

HSAs are important for several reasons. The average couple spends $300,000 in healthcare costs during retirement. HSAs are portable and can move with employees from job to job; however, in order to contribute, the employee must have a high-deductible health plan. More than 29 million people have HSAs.

Below are the 2022/2023 HSA contribution limits:

What is an FSA? How are FSAs used?

An FSA is a smart, simple way to help employees save on medical, dental and vision expenses. Employees choose the amount they would like to contribute to cover out-of-pocket healthcare expenses at the beginning of the year and equal deductions are made throughout the year. These expenses can include:

• Copays
• Prescriptions
• Vision
• Dental expenses not covered by insurance

Additionally, a Dependent Care FSA is a great way to help employees take care of those who depend on them. Dependent care plans give employees the option to contribute up to $5,000 ($2,500 for married individuals filing separately) pre-tax dollars annually to pay for eligible dependent care expenses.

What’s the difference between an HSA and an FSA?

An HSA is owned by the employee and can be opened and contributed to if an employee is part of a high-deductible health insurance plan. Additionally, an employee can only spend what is in an HSA account, but the amount follows an employee and/or carries over from year to year. FSAs are owned by the employer and employee are considered participants in the plan. However, funds in an FSA must be exhausted within a plan year and do not follow employees and cannot be rolled over (in entirety) into the next year.

Myth: If you have an HSA you can’t contribute to an FSA. However, you can contribute into a dependent care and a limited-purpose FSA to cover everything except for deductibles. You can contribute the max to your HSA and the max to your limited-purpose FSA.

Offering a Limited-Purpose FSA alongside an HSA could actually be a great idea. This combination will help your employees further reduce taxes when coordinated with an HSA.

Little-Known Facts about HSAs and FSAs

• There is an FSA store and an HSA store. Items are delivered straight to your door, and everything is HSA/FSA eligible. This is a good benefit for those with FSAs, when getting close to the end of the year; it’s a great place to buy things in bulk.
• There are two options employers can offer outside of use it or lose it for FSAs:
  • Grace period for up to two and a half months after the plan year end. Help your employees strategically plan how to use the money and exhaust funds so they don’t go to waste.
  • Some employers can offer carryover. The IRS maximum is $570 that can be carried into the next plan year.

• An HSA can help employees plan for retirement. Contributions can be made every year and they won’t disappear. HSA funds can also be invested for tax-free growth through mutual funds, stocks, etc. Once a person turns 65, they can use those funds for non-medical expenses, and will incur a penalty, just tax on the income.
• Although with HSA accounts employees can only use what is contributed and full annual amounts are not available immediately like with FSAs, some providers allow for accelerated funding which helps with expenses up front.
• The CARES Act made a number of over-the-counter items eligible for HSA & FSA spending.

How Paycor Helps
Paycor builds HR software to empower leaders. Our technology comes with personalized support from HR experts, who ensure our product is always up to date with the latest information about HSA and FSA limits. Learn more about our benefits administration software by taking product tour.

Paycor’s human capital management (HCM) platform modernizes every aspect of people management, from recruiting, onboarding and payroll to career development and retention, but what really sets us apart is our focus on leaders. For more than 30 years we’ve been listening to and partnering with leaders, so we know what they need: a unified HR platform, easy integration with third party apps, powerful analytics, talent development software, and configurable technology that supports specific industry needs. That’s why more than 30,000 customers trust Paycor to help them solve problems and achieve their goals.