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HSA vs. FSA: What Impact Does It Have on Employers?

Posted: 26 May 2020 05:17 AM PDT

Employer-provided health plans are the keystone of the American healthcare system, with health savings accounts (HSAs) and healthcare flexible spending accounts (FSAs) among the most prevalent methods of helping employees cover costs. As pretax accounts, these options can help cover copays, prescriptions and other necessities, but they have some caveats. While both savings account styles aim to provide a similar benefit to your employees, namely in how they impact taxable income, it's important to know the similarities and differences between them.

What is an HSA?

A health savings account is pretty much what its name suggests – a savings account set up for the sole purpose of covering healthcare costs. Provided by employers in concert with a high-deductible health plan (HDHP), an HSA is an employee-owned account used to squirrel money away for future health expenses.

Contributions, interest earnings, distributions and other HSA funds are tax-free. In most cases, the funding for an HSA comes directly from an employee's pretax income, though additional tax-deductible contributions can be made independently as well. Employers and other individuals can also contribute to an HSA.

"We kind of look at it as a triple tax benefit," Melissa Sotudeh, certified financial advisor and director of advisory services at Halpern Financial, told U.S. News late last year.

Over the course of a year, the amount of money in an HSA can grow as contributions are made. Though the account is largely tax-free, the IRS does set an annual contribution limit based on the type of coverage. According to the agency's guidelines for 2020, accounts for individual coverage have a maximum contribution of $3,550, while family coverage has a max of $7,100.

Whether they come from an employee, an employer or both parties, contributions to an HSA do not expire. An HSA can roll over funds from one year to the next and can follow an employee after they switch jobs.

Withdrawals from an HSA are only taxed if they're used for an ineligible expense, at which point the distribution is marked as gross income and hit with a 20% income tax penalty. If the employee is over 65 years old, however, the penalty on their income tax is ignored, though it is still included as gross income.

COBRA premiums can also be covered by an existing HSA as a tax-free expense, though an HSA is not subject to continuation under federal guidelines. Furthermore, other health insurance premiums outside of COBRA are not covered by an HSA.

 

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What is an FSA?

Like its newer counterpart, a healthcare flexible spending account – commonly referred to as a health FSA – is a type of savings account that helps employees cover qualifying medical costs.

FSA funds are only available if an employer offers the option to their employees and the accounts are owned by said employer. Most funding for an FSA account comes primarily from pretax deductions from an employee's paycheck, though their employer can also contribute. Unlike with an HSA account, the amount of pretax contributions an employee makes is determined during open enrollment, requiring employees to consider how much they will need to save to cover the entire year's health costs.

There are two types of FSAs – general purpose and limited purpose. A general-purpose flexible spending account can fund eligible healthcare expenses – including medical, prescription, dental and vision care – in the benefit plan year. A limited-purpose flexible spending account can only be used for dental and vision. General-purpose FSAs can be used with any type of health insurance, while limited-purpose FSAs are usually offered along with an HSA and a health plan with a high deductible.

The federal government and the IRS set a contribution limit for FSAs each year, though this type of account relies on the IRS' cost-of-living adjustments. For both general-purpose and limited-purpose FSAs, the IRS has established a contribution limit of $2,750 for any qualified medical expenses in 2020.

FSAs cannot be used for anything other than eligible medical expenses, nor can they cover COBRA premiums or other health insurance plans.

HSA vs. FSA

Both HSAs and FSAs are relatively new concepts in the American healthcare system that come with some big tax benefits. HSAs were established under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, while FSAs were created in the Revenue Act of 1978. In both instances, lawmakers sought to establish a tax-advantaged way to help American workers cover their healthcare expenses.

While there are some major similarities between a health savings account and a flexible spending account, there are some glaring differences to keep in mind. Here are some ways the two types of accounts handle medical expenses differently.

1. FSAs require an employer; HSAs do not.

The only way someone can obtain an FSA is through their employer. In fact, any employee can get an FSA, whether or not they actually have health insurance. While most HSAs are also obtained after joining a company, they require the person getting an account to have an HDHP.

2. Self-employed individuals can get an HSA.

While self-employed individuals are unable to obtain and contribute to an FSA, this isn't the case for an HSA. Again, the major eligibility factor for an HSA is that the account holder has and maintains a qualified HDHP.

3. HSAs do not expire; FSAs are "use it or lose it."

One way to look at these two accounts is long-term vs. short-term planning. HSAs act like any other savings account – they hold on to your money until you need it and can accrue interest in many cases. FSAs, however, require that you use up any money you've contributed by the end of the year. Any unused funds vanish at the end of the year. Employers can offer to carry over $500 from one year to the next in an FSA, but that's an optional employee benefit.

4. HSAs offer contribution flexibility.

Both accounts can be funded through a deduction from an employee's paycheck. Situations can change over the course of a year, so during circumstances where money is tighter than normal, employees with HSAs can adjust their contributions at any time during the year. Those with an FSA, however, must wait until the beginning of the next year to change their contribution amount.

5. Benefit rollover differs between the two.

Along with its year-to-year rollover of funds, an HSA can be used by an employee even after they leave the employer that provided it. For all intents and purposes, the employee owns the money in an HSA. Conversely, an FSA is owned by the employer, so it does not follow the employee after they leave.

Considering your options

The well-being of your employees and their loved ones should be a priority for you as a business owner. Without a safety net, employees can experience financial stresses that become a distraction at work and impact their productivity. If you are in the process of figuring out your company's healthcare solution or thinking about making a change, remember that both types of savings accounts can cover healthcare costs with some form of tax savings, but the one that works best for your business is up to you. [Read related article: Companies With the Best (Real-Life) Employee Benefits]

How to Handle a Bad Hire

Posted: 26 May 2020 03:00 AM PDT

Your employees are the lifeblood of your company, and one bad hire can severely impact your organization, which is why it is crucial to employ best practices when recruiting and hiring new employees. We spoke with business and legal experts to learn about the wide-ranging costs of hiring the wrong candidate, and five steps small business owners should take to handle it. 

What is the cost of a bad hire?

The exact cost of a bad hire varies, depending on several factors like industry type, employee salary, recruiting resources, onboarding and training, lost productivity, etc. The U.S. Department of Labor claims a bad hire can cost your business 30% of your employee's first-year earnings; other HR agencies estimate the cost to be higher, ranging from $240,000 to $850,000 per employee. 

"It's not just a matter of their pay or salary but also the resources used to train them and onboard them, which in some cases, can exceed the employee's pay in terms of monetary expense," said Jonathan Hill, chairman and chief executive officer of The Energists. "There are also intangible costs – clients or customers lost due to their mistakes, the impact on the mental health and stress levels of their co-workers, and the extra time spent by other team members to redo their poor work and salvage disrupted projects are the ones that come immediately to mind." 

When you hire an ill-fitting employee, the cost extends beyond monetary value. A bad hire can impact your overall productivity, company culture and reputation. What's worse, said Charles O. Thompson, attorney and shareholder at Greenberg Traurig, the cost of a bad hire can skyrocket if the employee becomes disgruntled and engages in litigation. 

How do you know if you made a bad hire?

There are several signs that indicate you've hired the wrong person for the job. Keep in mind that one of these signs alone does not necessarily mean you've made a bad hire. Rather, you have to analyze each case objectively, and consider the specific details and circumstances surrounding the employee you are evaluating. 

Here are some red flags: 

  • The employee is not producing the quality of work you agreed upon (after the appropriate training and learning period).

  • The employee does not have the skills they claimed to have in their interview (primarily, if these skills are pertinent to the job description).

  • They are consistently underperforming and missing the necessary key performance indicators.

  • The employee has a bad attitude, is frequently disagreeable or critical, or does not embrace company culture.

  • They are chronically tardy or absent.

  • The employee repeatedly makes the same mistakes.

  • They blame others for their mistakes or failures.

  • You receive recurring negative customer reviews or complaints about the employee.

  • The employee consistently receives poor performance reviews. 

"Anytime the capable and competent person you hired for a job fails to deliver (on projects, work, attitude or respect) consistently, they've become a liability for you," said Lindsay Teague Moreno, business owner and author of Boss Up! "Sucking up your time and company money, bad hires can quickly compromise the health and happiness of your business." 

When hiring a new employee, it is important to properly train them on their projects and duties so they are equipped with the knowledge for success. Give them an adequate amount of time to take on their new responsibilities since there is bound to be a learning curve in the beginning.   

Thompson said that certain manifestations may arise over time, though, that could not have been predicted in the hiring process. 

"Employees may feel entitled, develop negative attitudes, not understand their role in the company, or may not be sufficiently adaptive to the business," said Thompson. "This may manifest itself in decreased morale in the group, missed deadlines, increasing errors, or customer complaints and poor work quality." 

If your new employee is consistently demonstrating the signs of a bad employee after the learning period ends, identify if the employee is simply displaying unexpected behavior or if it's due to an error in your hiring process (e.g., you hastily hired without fully evaluating the candidate's skills and company fit). 

How do you handle a bad hire?

If a new employee is starting to exhibit some of the red-flag behaviors, follow this five-step approach to resolve the issue. 

1. Identify the problem and the reason behind it.

The first thing to do is evaluate and document the employee's performance. Identify trends and assess whether the issue is due to an error in your hiring process, or if it is the employee. Thompson said common hiring errors include rushing to fill a position, hiring based on a resume as opposed to a skill set, listing inadequate talent requisition skills or failing to check job references. If one of these internal hiring errors was made, you first need to revise your hiring process. You also want to assess your training process to ensure the employee has received the proper training. 

2. Discuss the problem with the employee as soon as possible.

If the issue is stemming directly from the employee, discuss your concerns with them and allow them to correct their mistake. It is important to address performance and attitude issues as soon as possible so you can resolve them before they get out of control. 

"Many companies have implemented management with more frequent performance reviews or performance improvement plans," said Thompson. "Many companies find that early action leads to the best chance of success, allowing an employee the opportunity to improve before they suffer irreparable reputational damage because they are not meeting the goals of the company." 

3. Adjust employee responsibilities as needed.

If the employee is putting in a lot of effort but still can't reach their KPIs, they may not be the right candidate for that specific role. If they are a great employee otherwise, consider moving them to another role that their talents are better suited for. If the issue is more serious, stemming from a poor work ethic or bad attitude, the employee is unlikely to be a good fit long term. 

"Attitude and work ethic are two things you cannot teach an employee," Moreno said. "If an employee fails to deliver a strong work ethic and a good attitude each day, it's time to part ways. Remember, your business is not personal, and you can't keep it going if you let the wrong people hang out at your place of business all day." 

4. Look for a replacement employee.

If a new hire isn't working out, Hill recommends reviewing other potential qualified candidates before terminating the employee. However, don't contact anyone for interviews until you've made an official decision to terminate the employee, but it can be beneficial to have other potential candidates in mind, just in case. 

5. Terminate the employee.

If you've conducted an analysis, discussed the issues with the employee, and are still seeing poor results, it may be best to terminate their employment. When terminating an employee, be kind, honest and direct. Make sure you comply with the applicable state and federal laws. 

"Best practices should be used in terminating any employee," said Thompson. "Those could include managing against objective criteria, a careful assessment of the employee's performance, documentation of the performance, and inclusion of human resources and management in the decision-making process." 

Can you fire a bad hire?

Yes, all 50 states and Washington D.C. are at-will employment states. This means that an employer can terminate an employee, or an employee can quit a job, for any reason without warning. Be mindful of complying with discriminatory protections like Title VII of the Civil Rights Act of 1964 (e.g., race, color, religion, sex or national origin), the Americans with Disabilities Act and the Age Discrimination in Employment Act of 1975. 

Additionally, some states have exceptions that an employee cannot be fired for regarding public policy, implied contracts and implied-in-law contracts. Statutory exemptions may apply as well. 

  • Public policy exemption. You can't fire an employee if it would violate a state or federal statute, or the public policy doctrine of the state. For example, an employee cannot be fired for performing an action that complies with public policy or refusing to perform an act that violates public policy. This applies to every state except Alabama, Florida, Georgia, Louisiana, Maine, Nebraska, New York and Rhode Island.

  • Implied contract exemption. You can't fire an employee if there is an implied contract between you two; however, this is difficult to prove. This applies to every state except Arizona, Delaware, Florida, Georgia, Indiana, Louisiana, Massachusetts, Missouri, Montana, North Carolina, Pennsylvania, Rhode Island, Texas and Virginia.

  • Implied-in-law exemption (covenant of good faith). The definition of this exemption varies from state to state, but essentially, you can't fire an employee if there is an implied-in-law contract between both of you, for example, firing a tenured employee so they can't receive benefits. This applies to Alabama, Alaska, Arizona, California, Delaware, Idaho, Massachusetts, Montana, Nevada, Utah and Wyoming.    

To reduce the potential for legal ramifications, Hill recommends protecting your business by including a probationary period in your employee handbook. 

"A probationary period gives you a window in which to evaluate whether new hires are a good fit for your company and lets the employee know their long-term employment with the company isn't guaranteed if they're not effective in their role," said Hill. "A 60-day probationary period is a good amount of time to give a new hire a chance to be successful without allowing them to negatively impact your business."
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