While the benefits of an FSA and HSA are well-known to the account holder — triple tax savings, a convenient, easy way to pay for eligible medical expenses, the option to invest in stocks, to name a few — what is often less talked about is the advantages they hold for employers.
And we're not talking about just for major corporations. Small businesses should definitely consider offering their employees an FSA or HSA. In fact, they remain a popular benefit. According to the SHRM's 2019 survey on workers benefits, nearly half of employers surveyed offer HSAs in 2018 and 2019, and two-thirds of employers offered FSAs.
Here are a few reasons why employer health savings accounts and flexible spending accounts are a smart choice:
They come with tax advantages
Just like how employees can benefit from tax savings with HSAs and FSAs, so can small businesses. Let's take a look:
- Employer contributions are usually tax-deductible business expenses. Just like how one can lower their taxes by writing off meals or equipment, contributions to an employee's HSAs can also provide tax savings.
- Employers don't have to pay federal income tax or employment tax on contributions they make to their workers' FSA. The employer's responsibility on employment tax, or FICA, is 7.65%, and covers Social Security and Medicare taxes.
Offer an employee benefit that is in demand
According to the Society for Human Resource Management (SHRM)'s 2019 Employee Benefits Survey, offering HSAs and FSAs is growing in popularity, and more businesses are offering it to their employees in 2019 than in 2018.
As healthcare is a top benefit desired by employees, offering a way for employees to save can help boost employee retention.
It's no surprise that HSAs and FSAs are an attractive benefit to offer your employees. For one, employees can use the funds toward qualified medical expenses — co-pays, prescriptions, and medical equipment and supplies.
And due to the CARES Act, one doesn't need a prescription to purchase over the counter (OTC) medicine using funds from their HSA or FSA. Menstrual cycle and feminine care products also can be purchased using money from one's account .
Employees also enjoy tax savings on HSAs — contributions are pre-tax, the money in their account grows tax-free, and they don't pay taxes when making withdrawals. The tax savings with FSAs lies in the fact that contributions are funded with pretax dollars.
Besides offering tax savings and being versatile, HSAs and FSAs offer flexibility. Funds in an HSA balance carry over to the next year. Unused funds in an FSA account typically need to be used by year's end. However, as an employer you can give your employees two carryover options. The first: to allow for up to $550 of funds to carry over to the next year, or provide a grace period of 2.5 months after the end of the year to use up the funds.
Offer a way for employees to save on telemedicine
The use of telemedicine was one of the fastest-growing health benefits in 2019 (SHRM), and has risen in 2020 due to the COVID-19 public health crisis. As the pandemic has made people more willing to use telehealth, it also allowed those with a high deductible health plan (HDHP) to temporarily cover telemedicine without needing to meet one's annual deductible first. In turn, this means that funds can be used from an HSA or FSA to cover telehealth (IRS).
As an employer, giving your workers an option to save on telemedicine, which is growing in use and popularity partly due to the pandemic, will help them save money on health-related expenses, and can give them an overall better quality of life.
By offering your employees a way to save on health care expenses, it could lead to them using their health benefits more. In turn, it could lead to healthier, more productive team members.
How small business owners can open an HSA or FSA
Opening an HSA or FSA account for small business owners is quite simple. You can set one up, or you can have it set up and administered through your payroll company.
However, you'll want to note the rules. The IRS has different rules you'll have to meet for both HSAs or FSAs:
For HSAs, it depends on whether or not you're contributing through a cafeteria plan. If we want to get technical, a cafeteria plan is a type of employee benefits plan. It's administered under Section 125 of the federal tax code. Its main draw? That employees can make contributions to their accounts from pre-tax income.
If you're contributing to your workers' HSAs under a cafeteria plan, you'll have to abide by nondiscrimination rules. If you're contributing outside of a cafeteria plan, then as an employer, you'll need to make comparable contributions. What this means is that you contribute either the same amount or the same percentage of the annual deductible limit of the employee's HDHP.
HSAs have different rules for employers. For instance, while HSAs don't have to be part of a cafeteria plan, FSAs do. You'll also need to set a maximum benefit amount. And like HSAs, employers need to abide by the IRS's Section 125 nondiscrimination rules.
It's apparent why HSAs and FSAs are a sound choice for both employees and employers. Besides offering an attractive benefit that adds to your workers' compensation package, as a small business owner you can also enjoy tax advantages when offering these health savings accounts.
And by offering an enhanced benefit that helps your workers save on medical expenses and improves their well-being, you're creating a work culture that promotes both financial and physical health.
Jackie Lam is a personal finance writer and is based in Los Angeles. Her work has appeared in Business Insider, Salon, Mental Floss, and GOOD. She is a candidate for the ACFPE® financial coaching certification.
Jackie is passionate about helping artists, freelancers, and gig economy workers with their finances. She has in-depth experience writing about budgeting, investing, frugality, money, and relationships, and loves finding interesting stories that revolve around money.