How to Streamline HSA and FSA Administration with Payroll Integrations

What’s the difference between an HSA and an FSA?

While both HSAs and FSAs allow employees to save for healthcare expenses, they differ in key ways:

• Health Savings Accounts (HSAs) are available only to individuals with a high-deductible health plan (HDHP). These accounts are employee-owned, meaning funds roll over from year to year, and contributions can continue even if the employee changes jobs. Unlike FSAs, employees can elect to change their contribution amount mid-year.
• Flexible Spending Accounts (FSAs) are employer-owned and typically follow a "use-it-or-lose-it" policy, meaning funds must be spent within the plan year (with some exceptions). Unlike HSAs, FSAs do not require an HDHP.

While these accounts serve different purposes, both require careful coordination between employers, employees, and payroll systems to function properly.

1. Participant eligibility and enrollment

Benefits providers must determine which employees qualify for an HSA or FSA based on employer-provided data, such as employment status, compensation details, and health plan enrollment. Typically this happens during the open enrollment period, but administrators need to be vigilant throughout the plan year to accommodate new hires, terminations, and other qualifying life events that may make an employee newly eligible, like aging out of their parents’ coverage. 

2. Payroll deductions and contributions

HSA and FSA contributions are deducted from employees’ paychecks on a pre-tax basis. Ensuring that deductions are accurate and properly applied each pay cycle is essential for compliance and employee satisfaction. While the amount an employee contributes to their FSA typically can’t be changed following open enrollment, employees can change their HSA deduction amount throughout the plan year.

3. Tax compliance and reporting

Both HSAs and FSAs come with strict IRS regulations. Administrators must ensure that contributions don’t exceed IRS limits and that necessary tax reporting (such as W-2 Box 12 codes for HSAs) is handled correctly. Since employees’ contributions are pre-tax, the amount withheld each pay period has major implications for the amount an employee is taxed — meaning one small miscalculation can have cascading effects on both the employee’s and employers’ tax liability.

4. Reimbursement processing and account management

For FSAs, administrators manage claims and reimbursements, ensuring that employees receive funds for eligible expenses. In cases where an employee has a debit card connected to their account, these administrators will still need to monitor the outgoing expenses to ensure they qualify for FSA use.

HSAs, while more self-directed, still require proper tracking of contributions, employer matches, and account maintenance fees.

Each of these processes depends on accurate, up-to-date payroll data — which is where payroll integrations come in.

1. Seamless eligibility verification

By integrating with the employer’s payroll system, you can automatically retrieve employee data, including hire dates, job classifications, and health plan enrollment details. This ensures that only eligible employees are enrolled in HSAs and FSAs, reducing the risk of coverage errors and compliance issues. 

And when the data is standardized — as it is through unified API providers like Finch — you can receive data from any payroll provider in the same format. In other words, data is mapped across different providers’ various field names to a single, consistent field name.

2. Automated payroll deductions

Without an integration in place, updating employee deductions during open enrollment requires a ton of effort from the employer. Following open enrollment, you’d likely send a deductions report to the employer’s HR or payroll team, which they must then manually enter into the payroll system for every enrolled employee — a cumbersome, time-consuming process that risks inaccuracies due to human error. They’ll also have to repeat this process throughout the year every time an HSA participant elects to change their contribution amount.

Alternatively, you could use payroll integrations to make these updates automatically. Bidirectional payroll integrations will sync data between the payroll system and your benefits software platform so that the deduction amount in your system is reflected on the employee’s paycheck — all without ever having to involve the employer. Automated payroll deductions both ensure the deductions are always accurate and applied on time — even if they change mid-year — and deliver a far better user experience to the employer and their employees.

Read more: How to Build an Automated Payroll Deduction System 

3. Simplified tax compliance and reporting

With direct access to an employer’s payroll data, you can easily track year-to-date employee contributions and employer matches to ensure participants don’t exceed contribution limits and to provide accurate year-end reports for W-2s. 

Plus, evergreen access to employers’ organization and payroll data means you can more easily offer additional administrative benefits, like year-to-date summaries and insights from census data that could help employers to understand trends, such as which employee groups most heavily rely on tax-advantaged health accounts.

4. Improved employer and employee experience

Employers are already feeling the strain of having to do more with less, so the more work you’re able to take on and automate as a benefits provider, the better. In a recent survey, Finch found that nearly 80% of employers spend 4+ hours on manual data entry every week. 

Payroll integrations significantly reduce the administrative burden on HR teams. They no longer have to manually share employee census and pay data or update individual employees’ HSA and FSA deductions. Plus, employees benefit from greater transparency and fewer payroll-related errors when managing their HSA and FSA contributions.

5. Stronger data security

The data you collect from employers is highly sensitive, making payroll data security a top priority for you as the benefits provider. Payroll integrations are one of the most secure ways to share this data because the information is encrypted and moved directly from the payroll system to your internal software through the payroll API, mitigating the risk of it being intercepted along the way or accessed by unauthorized parties. 

For example, Finch is SOC 2 and CCPA compliant and enforces best-in-class encryption protocols both when data is in transit and at rest. We also recently introduced Data Access Controls, which allow your application to configure what data is returned from the Finch API, limiting your exposure to non-essential personally identifiable information (PII) and employer data.

Read more: Security at Finch