How tax-advantaged savings accounts help stretch health care dollars
As a small business owner, you care about your employees, and want to help them prioritize their health and well-being. You also know that healthy, happy employees make for a healthier business and bottom line. But the cost of health coverage presents a challenge to both employers and employees.
One cost-effective solution to help offset the rising health care costs is a tax-advantaged savings account. There are several types of these accounts, and each comes with different rules and provisions, but the basic concept is an investment plan that enables employees to save for retirement or health care expenses using their pre-tax income.
In the context of health care, there are two main types:
1. Health Savings Account (HSA)
Used only in conjunction with a High Deductible Health Plan (HDHP), employees deposit a specific amount of pre-tax money directly into their HSA through payroll deductions, then use those funds pay for qualified medical expenses. The IRS defines an HDHP for an individual as a plan with an out-of-pocket maximum of $6,650 and a minimum deductible of $1,350 for the year 20181. Employers can contribute to the account as well, and often do as a means to offset higher upfront costs for care.
- Best for: Companies with many single and/or healthy employees with low healthcare use but who still want to maximize their savings while also reducing their taxable income.
- Contribution limit? Yes. For 2018, the employee and/or employer combined maximum for an individual is $3,450; and $6,900 for a family.1
- Unused funds: Since HSAs are employee-owned, any money remaining in the HSA carries into the next year. And if an employee takes a new job at a different company, his HSA funds will follow him.
2. Flexible Spending Account (FSA)
Like an HSA, employees contribute pre-tax dollars for medical expenses to this account via payroll deductions. While an HSA can only be used with an HDHP, an FSA is compatible with any type of health plan offered through an employer.
- Best for: Companies where the majority of your workers have regular and predictable healthcare needs.
- Contribution limits? Yes. For 2017, the maximum contribution limit (deducted from the employee's salary) is $2,600. The employer can provide a matching contribution as long as it does not exceed $500.2
- Unused funds: If an employee leaves the company, he forfeits any unused FSA funds.2 Otherwise, there are two ways employers can handle unused funds at year-end:
- If the plan has a carryover feature, participants can roll over up to $500 to the next year, but will forfeit the excess amount over $500.3
- If a plan doesn't have a carryover feature, an optional grace period through March 15 gives employees additional time to incur new expenses using prior-year FSA funds, but after that date all unspent funds are forfeited to the employer.4
Carefully considering how to offer health benefits enables employers to manage costs while still providing employees with benefits that satisfy their needs.
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