Three Pitfalls When Moving from an FSA to an HSA
In the employer market, deductibles have increased 67% since 2010. As more employers steer plan participants toward High Deductible Health Plans (HDHPs), Health Savings Accounts (HSAs) can often sweeten the transition. HSAs are a benefit available only to members participating in a HDHP. Both employers and employees can make pre-tax contributions into the account, and store up pre-tax cash to pay down deductibles when they incur claims.
To boot, employees can take their HSA with them once they leave the employer. Employee's contribute pre-tax, the accounts grow tax-free, and withdrawals for qualifying expenses are made tax-free. It has some great benefits.
That being said, employers already offering a Flexible Spending Account (FSA) to employees ought to keep a few potential pitfalls in mind as they transition.
1. HSA vs. FSA: Employees that use the FSA will lose it when they enroll in an HSA
While HSAs will run concurrent with an employer’s health plan year, FSAs will often have their own separate plan year. Since employees cannot participate in an HSA and a regular FSA concurrently, employees who elect an HDHP and HSA will have to terminate their FSA mid-plan year.
For example, if an employer had an FSA that renewed on July 1, 2016, and a health plan and HSA that renewed on January 1, 2017, then those employees enrolled in the FSA would lose that benefit come January 1.
Employers can avoid this disruption by syncing their renewal dates for FSA and Health Insurance.
That being said, when employees terminate their FSA by enrolling in an HSA, the employer will lose the remaining balance that has yet to be paid to the FSA account. For example, if an employee uses all of her FSA funds in month one of the plan, and stops paying after month six, then the employer is left eating the remaining unpaid balance.
2. Employees that decline a HDHP will lose their pre-tax health account
Employers often make the mistake of looking at the transition of an FSA to an HSA as an equal 1-for-1 swap.
Not the case.
Keep in mind that the only people that will be eligible to participate in the HSA will be those that enroll in the employer’s HDHP offering. Employers that terminate their FSA offering in light of a new HSA will be depriving their non-HDHP enrollees from any pre-tax funding account.
While this can be an effective way of steering employee participation in an HDHP, it can also backfire and be seen as a loss of benefit.
When an FSA and an HSA are offered alongside one another, participants are able to enroll in a Limited Purpose FSA (LPFSA) while contributing to an HSA. In an LPFSA, an employee has fewer qualifying purchases than in a regular FSA.
3. In an S-Corps, Owner/Partners cannot contribute to their HSA on a pre-tax basis
For owners and partners in S-Corp registered businesses, they will not be permitted to contribute to their HSA on a pre-tax basis.
The corporation’s contribution is viewed as a tax-free fringe benefit, and the corporation can deduct those contributions as a form of compensation to the employee. While this allows the employer to reduce their payroll taxes, they don’t get the double benefit by also being able to make pre-tax contributions to their own HSAs.
So, what can you do?
To wrap up, HSA vs. FSA consideration should not be viewed as a 1-for-1 equal swap, and employers should give careful consideration to the makeup of their employee population before transitioning to a HDHP/HSA combo. They should also consider the utilization of their current FSA.
If employers want to offer both an FSA and HSA, it benefits the employer to consolidate the administration of the accounts through a single Third Party Administrator, many of which can manage LPFSA and HSA accounts through a single Benefit Card and reduced administrative fee.