How to Maximize Savings Through Pre-Tax Healthcare Accounts
You likely provide your employees with great health insurance coverage and pay a portion of their premium, but even so, co-pays, deductibles, and coinsurance for doctor visits, prescriptions, as well as dental and vision expenses, can really add up! Not to mention the cost of an emergency room visit or unexpected surgery, which can range anywhere from a few hundred to thousands of dollars.
If your employees are not taking advantage of healthcare-related tax-saving accounts, now is the time for them to consider it! Annually, the IRS allows employees to set aside pre-tax dollars to use for qualified medical expenses. The money they set aside is not only not taxed, but they can use the money for their entire family’s medical expenses.
Two common pre-tax healthcare accounts are flexible spending accounts (FSA) and health savings accounts (HSA).
For both the FSA and HSA, the money that goes into an employee’s account is not subject to taxes. This allows employees the ability to stretch their money further, giving them more bang for their buck.
Advantages and Considerations of Flexible Spending and Health Savings Accounts
Let’s look at each of these account options one at a time starting with the flexible spending account (FSA).
Funds deposited into an FSA can only be used to pay for qualified medical, dental, or vision expenses such as co-pays, co-insurance, prescriptions, dental services, and vision care. You, as the employer, decide on your maximum amount allowable, which is typically close to the maximum allowable amount of $2,850 in accordance with IRS guidelines.
Employees elect the amount they’d like to contribute. You pre-fund their FSA account at the beginning of the plan year for the entire amount they elected. Those funds are available for the employee to use right from the start! Either they receive and use a debit card to pay for healthcare-related expenses, or, they can pay with personal funds and ask you for reimbursement.
You, as the employer, deduct contributions from the employee’s paycheck throughout the year to “pay back” the amount you pre-funded. Any funds the employee did not use during the plan year are returned to you unless you allow a portion to roll over to the next year in accordance with the IRS guidelines that limit the rollover amount to $570.
FSA Advantages for Employees
- Pre-tax (reduces their taxable income)
- Funds are available in total at the beginning of the plan year
- An economical way to cover out-of-pocket expenses such as deductibles right away
FSA Considerations for both Employees and Employers
- FSAs are a “use or lose it” type of account. If employees elect more funds than they spend in the plan year, they are at risk of losing that money. As mentioned before, employers do have the option of allowing an annual “rollover” amount of up to $570 that would allow employees to retain some of their unused funds.
- There are strict guidelines on using FSA funds for qualified expenses. Employees will often be required to submit receipts for services, which can create an administrative burden for the employer. You can review a list of qualified expenses here.
- If they leave employment mid-year, they may be required to reimburse their employer for the funds they’ve used and still owe. If you select a High Deductible Health Plan (HDHP), the only FSA account available to you is a “limited FSA”, which can be solely for dental and vision expenses. Those enrolled in an HDHP plan have the option of opening an HSA, which can also be used for medical expenses. We’ll talk about that in more detail below.
An HSA, or health savings account, is only available to employers that offer a qualified High Deductible Health Plan (HDHP) and to employees who enroll in the HDHP. This is the only type of account where money is not taxed on the way in – and not get taxed on the way out! You, as the employer, can choose to contribute a pre-tax dollar amount to an employee’s HSA or not contribute. Employees choose the same. Annually, the IRS sets limits on how much in total one can contribute to this type of account on a pre-tax basis – counting both employer and employee contributions. The 2022 limits are $3,650 for individual coverage, $7,300 for family coverage, and an additional $1,000 for those aged 55 and older.
Many employers elect to contribute a fixed amount to an employee’s HSA to incentivize enrollment in the HDHP, encourage participation in wellness activities, and help employees offset expenses. Employer-contributed funds are contributed whenever the employer chooses to contribute – usually half at the beginning of the plan year, and the other half in the middle or the end.
Employee-contributed funds are typically gradually deposited throughout the year (unlike the FSA). So, if an employee just opened an account and they have a large expense, they may still be on the hook for paying with out-of-pocket post-tax dollars.
Unlike the FSA, this account is owned by the employee – not the employer. If they change employers, that account goes with them. Employees receive a debit card to pay for expenses as needed. No reimbursements mean no administrative burden on you, the employer.
The funds contributed to their account are either used or remain in their account, rolling over year-over-year. This rollover feature enables an employee the ability to truly “save” for current or future medical expenses. Note: Employees cannot use HSA dollars for dental or vision expenses. They can pay for those expenses pre-tax by opening a limited FSA which we discussed above. Employees can also invest their HSA funds after they have saved a certain amount (rules vary by bank) which is a unique advantage of the HSA.
HSA Advantages for Employees
- Pre-tax contributions reduce taxable income
- Owned by the employee (so less administrative burden for the employer)
- Rollover and investment feature for unused funds
- Funds can also be used for dependent medical expenses
HSA Considerations for both Employees and Employers
- Must offer a qualified HDHP to offer an HSA
- Must be enrolled in a qualified HDHP to contribute to an HSA
- Contribution incentives for the employee
Who Has Control Over Contributions?
For an FSA, employee contributions are set at enrollment time and cannot be changed unless they experience a qualifying event. HSA contributions can be changed throughout the year, up to the allowed maximum.
Take control of your organization’s healthcare budget and make the most of your plan by offering your employees an FSA or HSA to help them pay for qualified medical expenses with pre-tax dollars. For both accounts, you can find a complete list of eligible expenses online at irs.gov.
If you’re an employer looking for resources like this to educate your employees about these plans or any of your benefits offerings, don’t hesitate to reach out!
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