The great debate in health benefits: FSA vs HSA. Health FSAs (health flexible spending accounts) and HSAs (health savings accounts) have a lot of similarities, but they also each have their own unique differences. Which works better for your organization—or could you use both?
It’s always a best practice to review your team benefits needs with a small business insurance expert, who can analyze your organization’s circumstances with you one-on-one. But in this article, we’ll touch on the basic differences between an FSA vs HSA for small business.
We’ll cover the benefits of each plan, detail their limitations, and even break it all down with an HSA vs FSA comparison chart. In the end, you’ll have a better idea of where you’d like to start in your journey toward providing the best possible benefits for your team, within your budget.
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FSAs and HSAs are two of the most common components (besides traditional group health coverage) that you might expect to find as part of an employer-sponsored benefits package.
As benefits, the FSA and HSA have many similarities. They’re both types of accounts (or places to put money) that allow employees to contribute that money pre-tax, reducing an employee’s taxable income.
They both can be drawn upon to fund qualifying medical expenses, like visits to the doctor, prescription medication, and a wide range of other healthcare-related costs. Both account types allow for employer contributions. But how are they different?
To begin, FSA vs HSA accounts have different eligibility requirements, ownership and portability elements, contribution limits, withdrawal parameters, qualified expense rules, and more.
This chart simplifies the basic differences between FSA vs HSA for small business:
FSA vs HSA Comparison Chart |
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Health FSA for Small Business |
HSA for Small Business |
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Eligibility Requirements |
An FSA cannot be used with a Marketplace health plan. FSAs are typically only available to employees, not to the self-employed. They may be limited to key executives or highly compensated employees. |
HSA plans must be paired with a high-deductible health plan (HDHP). An employee must be enrolled in an HDHP to set up an HSA account. |
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Contribution Limit |
$3,200 per year in 2024. |
$4,300 per year for individuals, and $8,550 per year for families in 2025. |
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Carryover/Rollover Limit |
An employer FSA may offer only one of either option: A) a $620 carryover limit per year in 2024 or B) a two-and-a-half month “grace period” during which the employee can use extra funds. An employer does not have to offer either option. |
No limit on carryover amounts, allowing an employee to grow the value of their account for decades and continue to fund qualifying medical expenses tax-free. |
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Ownership Rules |
The employer owns the FSA account; unused money at the end of the year belongs to the employer, not the employee. |
The employee owns the HSA account and may take the account funds with them if the employment relationship is terminated or the employee switches plans. |
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Withdrawal Parameters |
The employee can withdraw the full annual contribution amount on the first day of the year, even if the employee has not contributed. |
The employee may only withdraw the amount that has been contributed at the withdrawal date. While funds can be withdrawn for any reason, withdrawals not used for qualified medical expenses will be subject to income tax and, unless the employee is 65 or older, tax penalties. |
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Qualified Expense Basics |
The IRS defines which expenses count as “qualified” medical expenses. FSA funds may only be drawn upon for these expenses. Check out this list to determine FSA-eligible health care expenses. |
In general, HSA accounts have looser parameters surrounding what constitutes a qualified medical expense. To learn more about what constitutes a medical or dental expense, visit the IRS website here. |
A health FSA, or health flexible spending account, presents unique benefits for both employers and employees. Consider the following:
Tax benefits for both employer and employee: FSA contributions are made pre-tax. This means money going into an FSA account will be deducted from a paycheck before taxes are calculated or deducted.
First, this practice reduces taxable income for employees, often leading to employees paying less in taxes while working. Second, this practice reduces an employer’s payroll taxes, often leading to significant savings for a small business.
You can use an FSA with any healthcare plan. Unlike an HSA, choosing an FSA for small business employees won’t restrict the kind of health coverage you provide. This is one of the major benefits of FSA vs HSA for small business.
Immediate access to funds for employees: Another benefit of an FSA vs HSA for employees is that unlike an HSA, an employee can access the full contribution limit of their FSA account on the first day of the year. Choosing an FSA for small business employees can provide your workers with flexibility throughout the year (even at the beginning of the year) to pay for major and surprise medical costs.
An HSA, or health savings account, presents unique benefits for both employers and employees. Consider the following:
Tax benefits for both employer and employee: Just like with an FSA, HSA contributions are made pre-tax. Money contributed to an HSA account will be deducted from the employee’s paycheck before taxes are calculated. This leads to a lower taxable income for the employee, lower payroll taxes for the employer, and typically, significant tax savings for both parties.
They complement high-deductible health plans: If you provide a high-deductible health plan for your employees, you’ll typically see lower premiums than you would with traditional health plans. But while your employees are working toward meeting their deductible, the benefits of an HSA are definitely nice to have. The HDHP and HSA for small business can be a winning combination.
HSAs allow long-term access to funds. Unlike the “use it or lose it” proposition of the FSA, an HSA allows employees to access funds that were contributed in perpetuity. Because unused funds roll over from year to year, employees can build the value of their accounts over time and even invest the funds in the account.
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Are you exploring options for your small business, such as FSA vs HSA? Axcet HR is here to help. Axcet is a certified professional employer organization that specializes in guiding small to mid-sized businesses through their benefit options and helping them source the best budget-friendly packages for their teams.
Schedule a consultation with us today.