Health Care Benefits - HSA vs FSA

The government loves initials so the HSA (Health Savings Accounts) and FSA (Flexible Spending Account) are often confused for one another. Both the FSA and the HSA are pre-tax plans that can be used to cover a broad range of medical costs from band-aids to wigs (See full IRS list here). Let’s looks at the similarities and the differences so you know which may be right for your personal and practice situation.

The FSA

An FSA is a pre-tax savings tool that can allow your team members to effectively pay for qualified out-of-pocket health care expenses. The FSA is a plan established and owned by the practice in conjunction with the practice health insurance benefits package.

FSA Advantages

  • The FSA is generally funded by the team member via payroll deductions and no practice contribution is required.

  • The team members can pay for a large medical bill in the early part of the year even if they have not reached full funding of their annual FSA (See related disadvantage below).

FSA Disadvantages

  • You will need an FSA Administrator to manage the plan and ensure claims are handled correctly.

  • You must offer health insurance to employees in order to establish an FSA plan. It is not a stand-alone plan.

  • The FSA is a “use it or lose it” plan with the balance of the plan over the roll-over limit ($610 for 2023) being for forfeited by the team member at the end of the year.

  • The FSA contribution limit is only $3,050 for 2023 so it will not cover large medical costs.

  • FSA funds are not allowed to be invested but are just held by the FSA administrator to pay out claims.

  • The practice may need to prefund the FSA to cover any gaps in employee contributions if claims are submitted early in the year.

  • You are the practice owner are NOT eligible to participate so this is a benefit only for your team.

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The HSA

An HSA account allows you to stash money into a pretax account for future medical costs. But you must meet the following requirements to qualify for an HSA account:

  • You are not claimed as a dependent on anyone else’s tax return.

  • You are not enrolled in Medicare.

  • You are covered under a high-deductible health plan (HDHP).

HSA Disadvantages

  • You must be enrolled in a high-deductible health plan (HDHP) to qualify for an HSA so you will have more immediate out of pocket costs to reach your deductible. If you are relatively healthy and don’t have any planned costs (braces, stomach surgery, etc.) this likely won’t be an issue. If you do anticipate having higher than average medical spending, the HDHP and HSA combo might not be the best plan.

HSA Advantages

  • The 2023 HSA contribution limit is $7,750 if you cover your entire family and $3,850 if you are just covering yourself.

  • The HSA funds are owned by the individual (yourself or your team members) directly so less administrative costs and the ability of the individual to invest their funds.

  • The HSA is available to you as the practice owner. Please note that if you operate as an S-corp., you will need to contribute outside of payroll and get your HSA credit on your annual tax return.

  • Finally, HSA funds do not expire and can be used as wealth builders to save for medical costs in retirement. They are the only fund that is tax-free going in, grows tax-free and comes out tax-free (if spent on medical costs).

JNG Advisor Recommendations

Even in today’s difficult hiring environment, we recommend employee benefits that help you (the practice owner) first and then encourage team loyalty. Therefore, we generally consider offering an HDHP/HSA combo OR no health insurance benefit at all to be the best option.

Like all things tax, each situation is specific to individual and practice needs so feel free to contact us if you have questions about what plan might work best for you.

Jeff Gullickson