What's the Difference Between an FSA and an HSA?
- Employee Benefits
6 min. Read
Last Updated: 03/15/2022
Table of Contents
Employees' healthcare insurance needs may vary, but most U.S. workers look to their employer to provide this important benefit. In addition to health insurance, businesses may also want to offer additional health and wellness programs to attract and retain talent. Flexible spending accounts (FSAs) and health savings accounts (HSAs) are two options that allow employees to pay for medical expenses with pre-tax dollars. When evaluating the alternative features of an FSA vs. HSA, employers should estimate employee utilization and the relative costs and benefits of each.
What Is an HSA?
An HSA is an employee-owned health savings account where pre-tax dollars may be deposited and used to pay for qualifying medical expenses. Employees may set aside a specified amount from their paycheck and divert the funds into an HSA if they participate in a qualified high-deductible health plan (HDHP). Employers may also contribute funds to an HSA. One important feature of an HSA is transferability. Because an HSA belongs to the employee, any remaining balance remains with them when they leave the company. Also, unused funds in an HSA can be rolled over from one year to the next.
What Is an FSA?
An FSA is a flexible spending account that gives employees the opportunity to contribute pre-tax dollars throughout the year and use them to pay for qualifying medical expenses. FSAs are owned by employers, who may also contribute to the account on the employee's behalf. Employees do not need to participate in a HDHP to contribute to an FSA. However, the funds are not transferrable if they leave the company. FSAs also have limitations on the amount and timing of reimbursement. If all funds are not used at the end of the year, employers may choose to provide a grace period or allow for a specific amount of unspent funds to be carried over to the following year.
Read more about the features of FSAs and HSAs.
*Please note, the discussion of FSA in this article refers specifically to Medical FSA, not Dependent Care FSA.
FSA vs. HSA Comparison Chart: How Do These Accounts Differ?
The relative benefits of FSAs vs. HSAs may make one a better choice for an employee based on their individual situation. In the midst of benefit negotiations, employees may request one type of account over the other. Businesses will want to weigh factors such as administrative costs and expected utilization before choosing to implement one or both plans.
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Which Is Better: FSA or HSA?
Although both plans offer tax savings for employees and employers, FSAs and HSAs each offer unique features and relative benefits. Depending on your employee demographics and healthcare utilization, one type of reimbursement account may work better for your business. Your choice of healthcare plan will affect your decision to offer an FSA vs. HSA. If your company does not offer a high-deductible health plan, an FSA is the only option.
Benefits of FSAs and HSAs
FSAs do not restrict the type of healthcare plan a company must offer. Also, unused funds are reverted to employers at the end of the year, or after a grace period. Employers gain tax savings related to employees' pre-tax contributions as they are not required to pay their share of Social Security tax on these amounts. In terms of employee satisfaction and retention, the small cost of administering an FSA often yields a valuable benefit for employees who choose to participate.
Offering an HSA in conjunction with an HDHP will generally yield cost savings for businesses compared to traditional health care plans, because an HDHP is a less expensive option. Like FSAs, HSAs also result in tax savings for employers. Additionally, HSAs offer potential retirement benefits to employees when unused funds are carried over and may be taxably withdrawn for nonmedical expenses when participants reach age 65.
Challenges of FSAs and HSAs
FSAs have a lower contribution limit compared to HSAs, which reduces their comparative tax savings. Unused funds generally may not be carried forward. FSAs are also managed by the employer and are subject to some of the limitations of fringe benefits programs.
HSAs are offered only to employees participating in an HDHP. This limits the type of healthcare plans you may choose to offer if your company wishes to provide access to an HSA.
Can You Offer Both an FSA and an HSA?
Companies can offer both types of plans, but participants will need to choose one over the other for medical expense reimbursements. A limited FSA plan may be offered for HSA participants wishing to set aside extra funds for dental and vision expenses not covered by an HDHP.
Choosing the Healthcare Plan That's Right for Your Business
Your choice between an FSA or HSA often comes down to the type of healthcare plans you want to provide. If you offer an HDHP, an HSA will allow for larger contributions and additional flexibility to carry over funds from year to year. If you find that an HDHP does not make sense for your employee base, sticking with a traditional healthcare plan and offering an FSA may yield better utilization and employee satisfaction. Whether you choose one type of plan, or both, FSAs and HSAs offer important benefits that will help employers and employees manage the rising cost of health care.
If you need further assistance, Paychex Employee Benefits Services is ready to help you navigate the complexity of healthcare plans. We can work with you to weigh the relative costs and benefits of the many options available.