Small business owners know: the cost of providing health insurance and other health benefits for employees and their families is staggering.
According to the Kaiser Family Foundation, the total cost of providing health benefits for workers with families now approaches $2,000 per month per worker.
As a result, small businesses need to be creative when it comes to managing healthcare costs for employees, and consider outside-the-box solutions. Traditional health insurance is often a must-have for small businesses.
But it’s also the most expensive solution. Many smart employers are looking to alternative methods that still provide employees with the access to quality healthcare they deserve, but at a lower overall cost, after taxes.
Three of the most popular solutions include health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HSAs).
Each of these options has distinct features, benefits, and limitations that can impact both employers and employees. Recognizing the differences between them can help you determine which is the best fit for your business.
Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) are all effective tools that can significantly enhance the affordability of healthcare for employees. Each option provides unique benefits that can help manage and reduce out-of-pocket healthcare expenses.
Compare Pricing on the Best Insurance Plans Available
Health Savings Account (HSA)
Overview
An HSA is a tax-advantaged account foravailable to individuals enrolled in a high-deductible health plan (HDHP).
Contributions to an HSA can be made by both the employee and the employer, and the funds can be used to pay for qualified medical expenses.
Key Features
- Tax Benefits: Contributions are pre-tax, grow tax-free, and withdrawals for qualified expenses are tax-free. Additionally, any contributions directly from the employer can be exempted from payroll tax, as well… providing additional savings for both employer and employee.
- Portability: Employees own their HSA, meaning the funds remain with them even if they change jobs.
- Contribution Limits: For 2024, the HSA contribution limit is $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those 55 and older.
- Investment Opportunities: Funds in an HSA can be invested in ETFs and other securities, offering the potential for greater growth (though at some risk, as well.)
Pros and Cons
- Pros: Triple tax advantage, portability, long-term savings potential.
- Cons: Must be paired with an HDHP, which tend to have lower premiums, but also have higher out-of-pocket costs for employees in the event they need care.
Withdrawals for anything except qualified medical expenses are taxable, and additionally subject to a 20% penalty. However, this penalty goes away when the account owner turns age 65.
Health savings accounts are a great solution for small businesses who want to offer a powerful and popular health benefit to employees while saving on taxes. They are also a very popular addition to Section 125 cafeteria plans, which provide a tax-advantaged way for employees to customize their benefits to suit their own requirements.
Learn More: The Small Business Owner’s Guide to Starting a Section 125 Cafeteria Plan
Comprehensive Table Comparison Including HSA, FSA, and HRA
| Feature | HSA | FSA | HRA |
|---|---|---|---|
| Eligibility | Must be enrolled in an HDHP | Available to all employees | Employer discretion |
| Tax Benefits | Triple tax advantage | Pre-tax contributions | Reimbursements are tax-free |
| Contribution Limits | $4,150 for individuals, $8,300 for families (2024) | $3,200 (2024) | Employer-determined |
| Rollover | Funds roll over year to year | Use-it-or-lose-it rule | No use-it-or-lose-it rule |
| Portability | Employee-owned | Employer-owned | Employer-owned |
| Employer Contributions | Allowed | Allowed | Required |
| Use for Retirement | Yes, after age 65 | No | No |
| Pair with Health-Sharing | Yes | No | Yes |
| ACA Plan Requirement | No | No | Yes, for QSEHRA |
Side-by-Side Table Comparison of HSAs vs. FSAs
| Feature | HSA | FSA |
|---|---|---|
| Eligibility | Must be enrolled in an HDHP | Available to all employees |
| Tax Benefits | Triple tax advantage | Pre-tax contributions |
| Contribution Limits | $4,150 for individuals, $8,300 for families (2024) | $3,200 (2024) |
| Rollover | Funds roll over year to year | Use-it-or-lose-it rule |
| Portability | Employee-owned | Employer-owned |
| Employer Contributions | Allowed | Allowed |
| Use for Retirement | Yes, after age 65 | No |
Flexible Spending Account (FSA)
Overview
An FSA is a tax-advantaged account that allows employees to set aside money for qualified medical expenses.
FSAs are typically funded through payroll deductions, and the contributions are pre-tax.
Key Features
- Tax Benefits: Contributions reduce taxable income, and withdrawals for qualified expenses are tax-free.
- Use-It-Or-Lose-It: Funds must generally be used within the plan year, although some plans offer a grace period or a limited rollover option.
- Contribution Limits: For 2024, the contribution limit is $3,200 per employee.
Pros and Cons
- Pros: Immediate tax savings, can be used with any health plan.
- Cons: Funds must be used within the plan year, not portable, with limited rollover options.
Health Reimbursement Arrangements (HRA)
Overview
An HRA is an employer-funded plan that reimburses employees with tax-free dollars for qualified medical expenses.
However, unlike with HSAs and FSAs, only the employer can contribute to an HRA. Employees cannot contribute directly to an HRA.
Key Features
- Tax Benefits: Reimbursements are tax-free for employees and tax-deductible for employers. They also bypass payroll taxes.
- Employer Control: Employers decide the contribution amount and eligible expenses.
- No Contribution Limits: There are no IRS-imposed contribution limits, giving employers flexibility.
Pros and Cons
- Pros: Employer control over contributions and eligible expenses, no contribution limits.
- Cons: Not portable, dependent on employer’s funding decisions, no employee contributions.
Among smaller employers –– those with fewer than 50 full-time workers or the equivalent, the most popular type of HRA is the qualified small employer HRA (QSEHRA). It’s only open to these employers who do not offer a group health insurance benefit of their own.
Instead, QSEHRA sponsors reimburse workers who buy their own ACA-qualified health insurance policy. Reimbursements are tax-free.
As of 2024, the contribution limits for Qualified Small Employer Health Reimbursement Arrangements (QSEHRA) are as follows:
Self-Only Coverage: $6,150 per year, translating to a monthly cap of $512.50.
Family Coverage: $12,450 annually, or $1,037.50 per month.
Your workers are free to spend more if they like, but they can only be reimbursed for this amount.
Their reimbursement will offset any subsidies your employees might otherwise qualify for.
The chief benefit for employees is that they can choose their own health plan that best suits their own individual needs. Meanwhile, every dollar you pay in HRA benefits, including QSEHRA benefits, is exempt from payroll taxes, providing significant cost savings for both you and your employee beneficiaries.
Which is Best for Your Business?
Considerations
- Employee Needs: It is crucial to recognize your employees’ healthcare needs and financial situations. HSAs benefit employees looking for long-term savings and investment opportunities, whereas FSAs might be more suitable for those with predictable annual medical expenses. HRAs offer flexibility and control for the employer, making them ideal for businesses wanting to manage healthcare costs directly.
- Cost Management: If managing costs is a priority, an HRA provides flexibility without IRS-imposed limits, but it requires the employer to fully fund it. HSAs shift more cost responsibility to employees but offer significant tax advantages. FSAs can reduce taxable income but come with use-it-or-lose-it constraints.
- Plan Flexibility: HSAs require an HDHP, which might not be suitable for all employees. FSAs and HRAs can be paired with any health plan, providing more flexibility in plan design.
One of the primary differences between an HSA and an FSA is their rollover capabilities. HSAs allow funds to be carried over year after year, making them a more flexible and long-term savings option. FSAs, on the other hand, generally require that funds be used within the plan year, although some plans may offer a grace period or allow a limited carryover amount.
Another significant difference is portability. HSAs are owned by the individual, meaning they remain with the employee even if they change jobs. FSAs are tied to the employer and do not transfer if the employee leaves the company.
Which Option is Better for Your Business?
Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) can provide significant financial benefits for your business.
Here’s how:
HSAs: For businesses offering HDHPs, HSAs are a superior choice because they provide long-term savings benefits and empower employees to manage their healthcare expenses more effectively.
Pairing an HSA with a health sharing plan can further enhance savings, as these plans often have lower premiums compared to traditional health insurance. This combination can reduce overall healthcare costs for both the employer and employees.
FSAs: FSAs can be beneficial for businesses looking to offer immediate tax savings to employees and those who might not qualify for an HDHP. However, the “use it or lose it” rule can be a drawback, potentially leading to employee dissatisfaction if funds are forfeited.
HRAs: HRAs provide flexibility for employers to design their own reimbursement structures. They can be particularly useful for small businesses through Qualified Small Employer HRAs (QSEHRAs), which allow employers to reimburse employees for individual health insurance premiums and other medical expenses. This can be paired with health sharing plans, but employees receiving QSEHRA funds must purchase an ACA-qualified plan.
Compare Pricing on the Best HealthShare Plans Available
Conclusion
Having a comprehensive set of health benefits, which includes Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs), is indispensable for employers aiming to retain talent in today’s fiercely competitive job market.
Selecting the most suitable healthcare spending account for your business requires careful consideration of specific objectives and employee needs. HSAs, with their tax advantages and potential for long-term savings and investment opportunities, are ideal for organizations implementing High Deductible Health Plans (HDHPs).
FSAs provide immediate tax savings but come with stricter usage constraints. On the other hand, HRAs offer maximum flexibility and employer control over healthcare benefits. By evaluating these options against your business’s goals and the unique needs of your workforce, you can choose the healthcare spending account that maximizes value for your organization, supporting both financial objectives and healthcare requirements effectively.
I recommend scheduling a consultation with one of our Personal Benefits Managers to accurately assess which options align best with your business needs. Our experts offer complimentary, tailored advice to assist you in making a well-informed decision regarding your savings account selection.
For Further Reading: Best Healthshare Plans Comparison Guide 2025 | What To Do When Your Employees Can’t Afford Healthcare | Which is Better, Health Sharing or Health Savings Accounts (HSA’s)?
