Small Business Employee Health Insurance Coverage

The FSA (Flexible Spending Account) and HSA (Health Savings Account) are two health-coverage plans for employees.

A brief description of both of these tax-saving methods for covering medical costs is given below, along with brief suggestions for determining which one is good for your company.

FSA (Flexible Spending Account)

You can work out this health plan along with your employees. At the start of each year, you will indicate the amount to be contributed each month. You will then deduct this amount from your employees’ monthly paychecks.

You can also contribute to this amount along with each employee, and this contribution can be excluded from that employee’s gross income. There are no employment or federal taxes on these contributions.

The withdrawals used to pay for any qualified medical or dental treatments are also tax-free, and the money can be withdrawn for such expenses even if your employee has not yet put that much money in the account.

You can enter your employees into this plan in conjunction with other benefits, as part of what is called a cafeteria plan. However, as the employer, you are not eligible to participate. There is no upper limit on contributions, but any balance remaining in the account at the end of the year is forfeited.

This means that your employees will need to use the amount of money that they’ve put in the account or lose it. In order to make a claim, your employee will need to provide a statement from an independent third party confirming the medical expense, and also a letter stating that the amount has not been reimbursed by any other medical plan.

Interest is not paid on the money in the accounts.

HSA (Health Savings Account)

This account can be set up for your employees to pay for or reimburse medical costs they might incur in a year. You will need to appoint a trustee such as a bank, an insurance company, or anyone approved by the IRS to manage the accounts.

Again, whatever contributions made by you or the employee are tax-free for the employee. The employee will also earn interest on this account and money spent only on qualified medical expenses will be tax free; however, whatever money that goes into the account that is not used for legitimate medical costs will attract tax and possibly even a penalty.

Employees should have a high-deductible health plan [HDHP] and should not be enrolled in Medicare to qualify for the HSA. Since this plan is only for individuals, spouses will need to be registered under a separate HSA.

This plan can also be transferred by employees who leave your company or goes to work for another business.

Which is better–FSA or HSA?

An HSA seems to have more flexibility than an FSA, since the money in an FSA is forfeited if it is not used up at the end of the year. An FSA also does not pay interest on the money in the accounts, whereas an HSA offers tax-free interest.

For the employee, the portability of an HSA plan is an added advantage. Even small businesses are now choosing HSA plans, since they can be used to get medical benefits for themselves as well as their employees – and the contributions are totally tax free.

The government seems to be favoring HSAs, so there are more chances of incentives being added to these plans in the future. Take a close look at both of these plans in order to make an informed decision about health-care coverage for your company.