According to the Centers for Medicare and Medicaid Services, healthcare spending is expected to increase at a pace of 5.4% per year through 2028.
Offering an FSA, HSA, or HRA as part of a competitive benefits package can show employees you care by supporting them in managing the rising cost of healthcare.
These health benefits can also help small business owners attract and keep top talent.
Flexible Spending Accounts (FSA), Health Savings Accounts (HSA), and Health Reimbursement Arrangements (HRA) are three popular options that can help employees save money on qualified medical expenses.
Take time to understand the differences between each plan so you can find the right fit for your small business.
What are FSAs, HSAs, and HRAs?
While these account-based plan options have many features in common, HSAs, FSAs, and HRAs offer distinct benefits for you and your employees.
Flexible Spending Account (FSA)
Health FSAs are employer-established benefit plans that allow employees to set aside pre-tax dollars to pay for qualified health expenses. Employer contribution is not required, but employers can choose to contribute to employees’ health FSAs. Employees can use these accounts for a variety of medical costs, such as copayments, prescriptions, and some over-the-counter medications.
Key Features
- Tax savings. Pre-tax contributions through payroll deductions reduce taxable income.
- Immediate access. Funds are available at the beginning of the plan year.
- Employer contributions. Employers can opt to contribute to employees’ FSAs.
- Use-it-or-lose-it rule. Unused funds in an FSA do not roll over to the next year. Employers may offer a grace period or a limited carryover option.
Health Savings Account (HSA)
An HSA is a tax-advantaged account available for individuals enrolled in a high-deductible health plan (HDHP). Individuals must meet additional IRS criteria to participate in an HSA. Employees can use an HSA to save for medical expenses not covered by their insurance.
Key Features
- Triple tax advantage. Contributions are tax-deductible, while withdrawals for qualified expenses and growth are tax-free.
- Portability. Funds stay with the employee, even if they change jobs.
- Investment opportunities. Employees can invest funds and potentially increase savings.
- Rollover. Unused HSA funds roll over from year to year, so employees can build savings for future healthcare expenses.
Health Reimbursement Arrangements (HRA)
An HRA is an employer-sponsored plan that reimburses employees for qualified medical expenses. Unlike HSAs and FSAs, only employers can contribute to HRAs.
Key Features
- Customizable plans. Employers can design a plan to cover a wide range of medical expenses.
- Tax benefits. Reimbursements are tax-free for both employees and employers. Employers can deduct their contributions as a business expense.
- Reimbursements. Employees submit claims for eligible expenses, and employers reimburse them tax-free.
- Cost control. Employers can set annual reimbursement limits.
Finding the Right Health Spending Account for Your Business
Choosing the right plan for your business can depend on several factors. Here are some things to consider:
- Employee needs. Work to understand your employees’ healthcare needs and preferences. Employees with high out-of-pocket expenses may prefer an HSA, while those seeking more predictable costs might want an FSA or HRA.
- Costs and tax benefits. FSAs, HSAs, and HRAs all offer tax benefits, but they differ in terms of employer costs and administrative responsibilities. HSAs and HRAs can provide more long-term savings, while FSAs offer more immediate tax advantages.
- Business goals. If keeping talent is your priority, an HSA with employer contributions may be a good choice. If cost is the priority, an FSA or HRA may be a better fit.
- Benefits provider. Work with a reputable benefits provider to set up and manage FSAs, HSAs, or HRAs. These providers can offer valuable guidance, administration and documentation.
* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up to date.
