Pros and Cons of Offering an FSA, HSA, or HRA
If you’re looking to add a new healthcare benefit for your employees, you may have run into some confusion over the choice between FSA, HSA, and HRA. They are all similar, but there are important differences that will affect you and your employees. Each of these accounts are tax-free savings accounts which employees can use to pay medical, dental, and vision fees. FSAs and HSAs each have annual limits on how much can be contributed, while HRAs do not. The kind of account you can offer depends on the healthcare plans you offer employees. Let’s break down what makes each kind of account unique.
Flexible Spending Account (FSA) Characteristics
This is a flexible healthcare spending account that can be used for medical, dental, and vision expenses. Your employees can contribute to this account tax-free, but there is a limit of $2,750 that they can contribute annually. Once money has been contributed, it can be easily accessed through a debit card linked to the account. Employees can use FSAs to designate funds for healthcare needs while also getting a tax break.
However, there are some stipulations when it comes to unused funds. What happens to these unused funds is up to you as the employer. Unless you say otherwise, these unused funds are forfeited. You can, however, choose to let up to $550 roll over to the next year or give employees a 2-month grace period to spend the extra money in the next year. Aside from some special circumstances, if an employee leaves your company, their FSA contributions will be forfeited.
Health Savings Account (HSA) Characteristics
The health savings account works as a personal savings account which employees can contribute to. They can contribute more than with an FSA. In an HSA, single employees can contribute up to $3,350 annually and families can contribute up to $7,100 annually. For employees over 55, the annual amount they can contribute goes up by $1,000 per year older than 55 they are. The federal government will not tax HSA contributions. Unlike the FSA where an employee forfeits their money if they don’t spend it all each year or if they leave, employees own the HSA so their money stays theirs no matter what.
These funds can be withdrawn to pay for the medical expenses of themselves, their spouses, or their children. If funds are withdrawn for an unqualified medical expense, then the money will be subject to income tax and a 20% penalty will be imposed. However, if the employee is over 65, income tax will be applied but there will be no 20% penalty.
Health Reimbursement Account (HRA) Characteristics
Unlike HSAs and FSAs where the employee contributes the money for the account, with HRAs the employer makes the contributions. Since the employer owns the account, they decide which expenses the HRA can be used for and how much of the unused funds roll over to the next year. Also, if the employee leaves the company, they don’t take the remaining funds in the HRA. After contributing to the HRA, employers can claim those contributions as a tax deduction.
Employees can use their HRA funds for out-of-pocket medical expenses that are eligible according to the employer. Employees can use HRA funds on their own medical expenses or those of eligible dependents.
Plan IV | FSA, HSA, and HRA plans available for your employees
While each FSAs, HSAs, and HRAs have their pros and cons, no one type of account is best for every business. Consider what healthcare benefits you offer your employees already and choose the type of account that will fill in the remaining gaps as best as possible. If you’re still unsure about which kind of account you should offer employees, feel free to get in touch with Plan IV. Our knowledgeable staff can listen to your current situation and offerings to help determine which kind of plan offering would be best for your employees and your business. We can also help you and your employees enroll and get these accounts set up.
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