With the rising costs of healthcare, employers are constantly looking for ways to save on premiums while still offering the best benefit combinations to their employees. One way employers have done this is to adopt high deductible health plans (HDHP) and then offer some sort of healthcare reimbursement plan to help offset high out-of-pocket expenses. Depending on the type, these plans can be offered alongside of a medical plan and can even be administered pre-tax. In order to determine which plan may be right for your group, it is important to know the similarities and differences of the 3 main types.
HSA: Health Savings Account
One of the most popular reimbursement plans is the health savings account (HSA) and can offer many benefits to employees. HSAs are a pre-tax benefit that is administered by a third party administrator or bank. Individual health savings accountholders deduct contributions on their federal income tax forms or contributions made through employer sponsored accounts are tax-free. Any interest earned in a health savings account also stays out of the reach of the IRS as long as the funds are used for eligible expenses. At the end of your plan year, you still get to keep all the money in the account. This continually rolls over and can accrue interest depending on your particular HSA plan. Unfortunately, not everyone can have an HSA. HSAs are only available when you are enrolled in an HDHP with no set co-pay amounts. If you leave an employer, funds in an HSA are still yours.
FSA: Flexible Spending Account
Flexible spending accounts (FSA) are only available as employer sponsored plans and fall under Section 125 of the IRS tax code. These funds are always pre-tax and must be used for eligible medical expenses. During open enrollment, you decide how much money you would like to set aside for medical expenses that year. This amount is then split up and deducted from your paycheck each pay period. Unlike an HSA where the account accrues value each month based on contributions to the account, your entire plan year FSA elected amount is available to use at the beginning of the plan year and you pay them back through your payroll deductions. This practice is commonly known as front-loading. Another big difference is left over funds do not roll over or accrue interest. In some cases, employers offer either a grace period after the new plan year starts to give you the chance to use old funds or will allow you to carry over up to $500 to use in the new plan year. If neither of these are an option, the funds are forfeited. It is important to plan ahead when using an FSA so you do not lose money or run out too early in the year.
There are a few types of FSAs with small differences. The first is the standard FSA that can be used on any qualified healthcare expense. You can also have a Dependent Care FSA which can be used for qualified child or elderly care expenses as long as they are tax dependents of the policyholder. Lastly, if you have an HSA, you can still have a Limited FSA that only allows you to spend on dental and vision expenses.
HRA: Heath Reimbursement Arrangements
HRAs or healthcare reimbursement arrangements are employer-funded accounts that are designed to help employees pay for qualified out-of-pocket medical expenses. These accounts are solely funded by the employer and are compatible with all types of health plans. The employer funds a fixed dollar amount per year that the employee can use for healthcare reimbursements. In many cases, this money rolls from one month to the next, and sometimes from year to year. When the employee uses the entirety of the monthly allowance, no more reimbursements will be issued until the next month. HRAs are notional arrangements, meaning they do not need to be pre-funded. This gives the company the added benefit of being able to control costs while still aiding employees with medical expenses.
No matter what type of plan you currently have or are considering, never try to do it alone. A third-party administrator has the tools and skills needed to find the best plan to fit the needs of your employees and your group and can provide additional layers of data security when dealing with claims and disbursements. If you have questions, contact one of our consultants for answers.