When deciding between a Health Savings Account (HSA) and a Flexible Spending Account (FSA) for your employees, it’s important to understand the key differences and benefits of each option. HSAs offer tax advantages and flexibility, allowing employees to save and invest money for future medical expenses, but they require enrollment in a high-deductible health plan (HDHP). FSAs, on the other hand, provide immediate tax savings for a wide range of healthcare expenses but have a “use-it-or-lose-it” policy, meaning funds must be spent within the plan year. Understanding the unique features, tax benefits, and usage restrictions of HSAs and FSAs will help you choose the best option to meet your employees’ healthcare needs and financial goals.

HSA vs. FSA for Small Business Employees

As a small business owner, offering your employees a comprehensive benefits plan can help you attract top talent and reduce turnover. There are a variety of benefits plans that you can offer your employees, such as a Flexible Spending Account (FSA) or a Health Savings Account (HSA). Not all small business owners understand the distinctions between the different kinds of medical savings accounts and you may find yourself wondering: “What’s the difference between a Health Savings Account (HSA) and a Flexible Spending Account (FSA)?”. Well we’re here to answer that question, and more, in the article below.

Continue reading to find out more about the difference between HSA and FSA and which is better for your employees.

What is an HSA (Health Savings Account)?

A Health Savings Account (HSA) is designed to work in conjunction with qualifying high deductible health insurance plans (HDHPs). When small business owners offer employees an HDHP, you may be offering them an accompanying health insurance plan with lower monthly premiums but a higher annual deductible than other possible plans. A Health Savings Account is a tax-advantaged savings account that can offset the higher annual deductible costs of HDHPs by paying for designated health care expenses.

Pros of HSA

Here are some of the favorable aspects of choosing an HSA for a small business:

• You can put away more money. An HSA allows employees to save $3,650 per year (individual coverage) or $7,300 (family coverage).
• There is a catch-up contribution. Participants over 55 can put away more money for medical expenses.
• You can use it for your deductible and out-of-pocket cost.
• Your money may earn tax-free interest. The bank managing the HSA may allow you to invest the money.
• HSA savings continues to roll over year after year. In fact, you can use it for healthcare expenses when you retire. Some participants accrue large sums of $60,000 or more.

Cons of HSA

Here are some of the downsides of choosing an HSA for a small business plan:

• It comes with a higher deductible. If you don’t expect major medical expenses, this isn’t a big deal. However, you could end up footing a large bill for emergencies. On the plus side, you’ll have lower premiums with a high-deductible healthcare plan.
• The money grows throughout the year. If you have a major medical expense in January, your HSA may not be of much help (unless you’ve rolled over money from prior years).

What is an FSA (Flexible Spending Account)?

As the name suggests, a Flexible Spending Account offers small business owners and employees more leeway when it comes to choosing an insurance plan. The FSA is still a tax-advantaged account designed to cover health care costs but it works with any type of health insurance plan – not just qualified high-deductible plans.

Pros of FSA

When comparing small business FSA vs HSA, here are the advantages of going with a small business FSA:

• You don’t need insurance to open an FSA account. This is beneficial for employees covered under their spouse’s plan but who want to set aside pre-tax money for healthcare.
• Participants can access money as early as January 1st.
• You can use the funds to pay your deductible. Most insurance plans have a deductible, or amount you pay out before the insurance covers medical costs. You can use an FSA to cover those expenses.

Cons of FSA

Here are FSA disadvantages:

• It has a lower limit than an FSA. You can only put aside up to $2,850. Any out-of-pocket expenses over this are your direct responsibility and you’ll pay them out of after-tax dollars.
• You can’t roll over more than $500 into the next year. You have to use the rolled over funds in quarter one of the new year or lose the money.

Key differences between HSA and FSA

There are some major differences between these two types of accounts. For example, as the employer, you own the FSA and that account is connected to the job. On the other hand, an HSA account is linked specifically to the person, not the job.  So employees maintain ownership of their HSA account and can also transfer their funds if they change jobs.

Another major consideration for small businesses deciding between the HSA vs FSA model is rollover rules. Employees can rollover HSA funds from one year to the next, meaning that the HSA can grow from year to year, but they must use all their FSA monies by the end of the year or lose them in most cases. The leftover funds in an FSA generally revert to the employer.

With a Flexible Spending Account, small business owners set up a pretax payroll deduction for each employee to use throughout the year and that cannot be changed unless the employee has a qualifying life event such as a marriage.

With HSA accounts, the employee can usually change his or her distribution rate with each check. As an employer, you can opt to contribute to either plan as part of your employee’s benefits package.

	Flexible Spending Account (FSA)	Health Savings Account (HSA)
Available to	May be made available to employees by employers regardless of what kind of health insurance plan they are enrolled in.	Only available to employees enrolled in a qualifying HSA-eligible high-deductible health plan (HDHP).
Annual Contribution Limit 2024	An employee participating in an FSA can contribute up to $3,200 through payroll deductions in the 2024 plan year.	In 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage.
Carryover Limit in 2024	Carryover option up to $640, if set up by employer.	All funds carry over automatically.
Ownership	Account owner: Employer	Account owner: Employee
Interest	No interest accrual	May accrue interest
Withdrawal Rules	Withdrawal only for eligible healthcare expenses.	Withdrawals for qualified medical expenses are not taxed and no penalty applies. Non-qualified withdrawals are taxed as income and a 20% penalty may apply for persons under age 65.
Eligibility and Enrollment	Available regardless of health plan, enroll during open enrollment	Requires HDHP, enroll any time
Tax Advantage	Contributions pre-tax, tax-free withdrawals for eligible expenses, reduces income taxes but not payroll taxes	Contributions tax-deductible, earnings and withdrawals tax-free for medical expenses, reduces income and payroll taxes
Usage and Flexibility	Immediate medical, dental, vision expenses, must use within plan year or forfeit with limited rollover options	Wide range of medical expenses, future healthcare costs, and certain Medicare premiums, funds usable for non-medical expenses after 65 (taxed as income)

How to choose between HSA and FSA for small business employees

Should you choose an FSA or HSA for your employees? Choosing between an FSA, HSA, or even an HRA for your employees involves understanding the specific advantages each account offers. It’s important to evaluate the unique needs of your workforce and the financial implications for your business. eHealth is here to help you navigate these options, providing insights tailored to your situation. Ultimately, the best choice will depend on a thorough comparison of these accounts’ features and benefits.

Assessing personal healthcare needs

When deciding between an FSA and an HSA, start by evaluating your current and anticipated healthcare expenses. Consider factors such as regular doctor visits, prescription medications, and any ongoing treatments or therapies. Additionally, think about potential future healthcare needs, like planned surgeries or the likelihood of needing specialist care. By understanding both your immediate and long-term healthcare expenses, you can better determine which account will provide the most benefits and coverage for your situation.

Comparing employer contributions

Employer contributions can significantly impact the value of an HSA or FSA. With an HSA, employers can contribute to the account, often boosting the total funds available for healthcare expenses. These contributions are typically tax-free and can be a substantial addition to your savings. FSAs may also receive employer contributions, but the rules and amounts can vary. Understanding the specifics of your employer’s contribution policy for both accounts will help you make an informed decision.

 Considering tax benefits

Both HSAs and FSAs offer tax advantages, but the benefits differ. Contributions to an HSA are tax-deductible, and the money grows tax-free. Withdrawals for qualified medical expenses are also tax-free, providing a triple tax benefit. FSAs offer pre-tax contributions, reducing your taxable income, but they do not have the same growth and withdrawal tax benefits as HSAs. Calculating your potential tax savings with each account can help you understand which option maximizes your financial advantage.

Long-term financial planning

HSAs can be a powerful tool for long-term financial planning. Unlike FSAs, HSA funds roll over year after year and can be invested, allowing the account to grow over time. This makes HSAs not only a way to cover current healthcare costs but also a means to save for future expenses, including those in retirement. FSAs are generally more suitable for managing immediate or short-term healthcare costs due to their “use-it-or-lose-it” rule. Aligning your choice with your long-term financial goals will ensure you get the most benefit from your healthcare savings strategy.

Frequently asked questions: HSA vs. FSA

Can you have both an HSA and FSA?

Generally, you cannot contribute to both an HSA and a traditional FSA in the same year. However, there is an exception: you can have a Limited Purpose FSA (LPFSA) that only covers dental and vision expenses alongside an HSA. This allows you to maximize your savings for specific healthcare needs while benefiting from the tax advantages of an HSA.

What are the common eligible expenses for HSA and FSA?

Both HSA and FSA funds can be used for a variety of eligible healthcare expenses, including doctor visits, prescription medications, medical equipment, dental care, and vision care. It’s important to refer to IRS guidelines or your plan’s details for a comprehensive list of eligible expenses to ensure you’re using your funds appropriately.

What are common misconceptions about HSA and FSA?

Misconception 1: HSA and FSA Are Interchangeable

• Clarification: HSAs and FSAs have distinct differences. HSAs are paired with high-deductible health plans (HDHPs), offer triple tax benefits, and funds roll over year to year. FSAs, on the other hand, are available with various health plans, provide immediate tax savings, but typically have a “use-it-or-lose-it” policy.

Misconception 2: HSAs Are Only for High Earners

• Clarification: While HSAs can be highly beneficial for high earners due to their tax advantages, they are accessible to individuals at different income levels. Anyone with an HDHP can contribute to an HSA, and the tax-free growth and withdrawals for qualified expenses offer valuable savings for all income brackets.

Misconception 3: FSAs Are Not Worth It Due to the Use-it-or-Lose-it Rule

• Clarification: While FSAs do have a “use-it-or-lose-it” policy, recent changes and options add flexibility. Some employers offer a grace period or allow a limited rollover of funds to the next plan year. These options can make FSAs a worthwhile choice for managing annual healthcare expenses effectively.

At eHealth, we also have access to top small business health insurance providers if you’re shopping around for the best benefits at the lowest price for your employees.

So now that you know about the benefits of these programs, let the experts at eHealth help you find insurance that’s right for your small business. Contact us today or compare individual and family health insurance plans to get started!