Benefits

Saving for Health Care: Tax-Free Options for Your Employees

Ryan Miller
July 28, 2015

saving-for-health-care-options-for-your-employees

I don’t pretend to know much about the tax code. Former Secretary of Defense, Donald Rumsfeld, self-reportedly sends the same letter with his taxes each year to the IRS explaining that, despite “trying hard” and “being a college graduate” that: “I know that I do not know whether or not my tax returns are accurate.” And who can blame him? TurboTax can only teach us so much.

There are, however, two general tax quips that I have committed to memory in order to guide my thinking:

  1. “If they don’t get ya comin’, they get ya goin.” Translation: “If you don’t pay taxes now (on the premium), you’re going to pay taxes at the end (on the benefit).”

  2. If the IRS puts a cap on how much you can put into something, it’s probably because they recognize it’s a pretty darn good deal.

Lucky for us, the alphabet soup of tax-preferred benefit accounts—HSAs and FSAs—lets us skip taxes entirely (let’s tea a harbor!), AND they’ve all got contribution caps. A rare “win-win!”

In future posts, we’ll explore the unique attributes of these health care accounts in much more detail, but let us begin by laying a solid foundation about exactly what’s out there.

Flexible Spending Accounts (FSAs)

There are three different options of Flexible Spending Accounts: full health, limited health, and dependent care.

Full health is good for everything (medical, dental, vision) and traditionally partners with PPO plan options. On the flipside, limited health is only for dental and vision expenses and can be partnered with High Deductible Health Plans—without jeopardizing HSA eligibility.

To be fair, dependent care FSAs have absolutely nothing to do with medical insurance. These accounts are tax preferred for dependent care expenses (shocking, I know), and most use these accounts for dependent children; however, few realize that these accounts can also be used for dependent adults who require regular care (elder care).

Health Savings Accounts (HSAs)

There is one kind of Health Savings Account and it is all inclusive. HSAs offer pre-tax dollars for medical, dental, vision, and some over-the-counter expenses, and are the right hand to High Deductible Health Plans (HDHP). If you’re on an HDHP and you haven’t opened a HSA, open one. Now. If you have a time machine, open one yesterday.

What’s the difference?

Fourth-grade me would have been the first to tell you that the difference is the first letter. In actuality, the biggest difference between FSAs and HSAs is the "S"–one (FSA) is a commitment to spending an amount of money each year (use-it-or-lose-it), while the other (HSA) is a personal account that lets you save what you don't spend and keep using your HSA money year after year.

Which do I offer employees?

If you offer a High Deductible Health Plan, absolutely offer them Health Savings Accounts. Not only do they let employees spend tax-free dollars on expenses, but they foster all the right actions around saving money and smart consumer behavior. If you offer a PPO, giving employees FSA options lets them have the same tax-free options for known expenses and security of cash at-hand for the unexpected. Want to offer both HSAs and FSAs to your employees? Of course you can do it, but be ready to educate, educate, educate! If you’ve opted into one (or more) of these kinds of accounts, be sure to get the most out of it.

If you’ve always thought about trying it but just couldn’t check that box, I hope this will give you the courage you need to skip the taxes and save some green! After all, who’s in favor of paying the government less?