With health insurance costs soaring, employees are shouldering more of the burden. Employers who once covered all costs are now choosing plans that are a cost benefit for the business. Employees have to research to find the employer-provided plan that works for them. Health care spending accounts can help employees pay for a myriad of out-of-pocket expenses.
Prescription drug charges. Copays. Orthodontics. Orthotics. The list of expenses not covered by health insurance goes on and on. The employees of your small business see the health insurance that you provide as a significant asset in the benefit package. Nevertheless, more and more expenses are not covered. Allergy medications, like Allegra and Claritin, once available by prescription, now are over-the-counter purchases.
With a health care spending account (HSA), also known as a flexible spending account (FSA), employees are reimbursed for any medical, dental, or vision expenses with pre-tax dollars set aside at the beginning of the year. Similar accounts are available for dependent care or child care expenses. Employees are not taxed on money put into the account as long as all expenses are qualified. For instance, an employee cannot use the HSA for workout clothes, but can claim for the cost of prescription glasses.
Benefits of HSAs for Employers
The administration of the health care spending accounts is relatively easy for the employer. Employees contribute a set amount from their paychecks through payroll deductions. The health care spending account will provide debit cards to all plan members. For some plans, members keep receipts for any expenses and file reimbursements. Each employee can only receive reimbursements up to the monetary amount in the health care spending account.
Of the tax benefits of HSAs, employees can deduct the amount of HSA contributions on their federal income taxes. Any employer contributions are not counted as taxable income. Employees can withdraw funds from the account for eligible expenses tax free. Employer contributions are not subject to withholding for the purposes of tax legislation, like FICA, FUTA, or the Railroad Retirement Act.
With rising health insurance costs for employers, the health care spending account would allow the employer to offer an employees the two-fold option of a health insurance plan and a flexible spending account for extra medical related expenses, as well as to pay for those procedures not covered by medical insurance. An employer could switch to a less expensive plan while opting in to a health spending account as a cost-saving measure while still providing employees with health care coverage.
Setting up a Health Care Spending Account
Flexible spending accounts can be set up when employees are covered by a high-deductible health plan that meets federal requirements. Employees without health insurance can also set up an HSA account. An employer can enroll any employees in to the HSA, unless covered by Medicare. An employee who can be claimed as a dependent on someone’s tax return cannot have an HSA.
Employers should research all options before choosing where to host the HSAs. Two options available for hosting include (1) a health insurance plan or (2) a bank/credit union or other institution approved by the IRS to serve as an HSA trustee.
Get Employees on Board
When instituting an HSA, keep the lines of communication open for employees. Employees need guidance from you or an administrator of the HSA on the following:
- how much money to place in the HSA each year
- the fact that any money added to an HSA must be used within the calendar year -- the “use-it or lose-it” rule
- the expenses that are eligible and any noneligible expenses, for instance contact lens solutions are covered while gym and fitness club memberships are not covered expenses
- deadlines for enrolling in an HSA, deadlines for withdrawal, deadlines for filing claims, penalties
- the fact that details to an employee’s enrollment in the HSA cannot be changed
- what to do when you retire
- how to file a claim for reimbursement of expenses