As health care costs and insurance premiums continue to rise, employers are always on the lookout for ways to reduce their insurance expenses. One common approach is to offer lower premium, higher deductible health plans paired with a tax-advantaged savings account. From Flexible Spending Account (>FSAs) to Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs), there are a lot of options to choose from, and deciding which to offer can be a challenge. This blog post will go over their similarities and differences to help make an informed decision.
The big questions employers often ask is: What’s the difference between these types of arrangements and which is better?
First, let’s touch on how these types of programs are similar.
They are all typically employer-sponsored, help alleviate the high cost of medical care, and provide tax advantages to both employers and employees. They also give employees an incentive to be more informed health care consumers and take more control over their health care.
Now, let’s look more closely at all of these plans and their key features.
|Funding||Employee-funded (Employers may choose to contribute)||Employer-funded (Employees cannot contribute)||Employee-funded (Employer may also contribute)|
|Employer-owned (in employee's name)||Employer-owned||Employee-owned|
|None||Must be combined with a group medical insurance deductible plan||Must be paired with a Qualified High Deductible Plan (QHDHP)|
|Medical, dental, vision, prescription and some OTC expenses for employees and dependents||Employer-approved expenses for employees and qualified dependents||IRS-approved medical, vision, dental expenses for employees and dependents|
|$2,750 per plan year in 2020||Employer-controlled; no specified amount||Contributions not to exceed $3,550 (individual)/$7,100 family|
|None||None||Yes, employee takes funds when leaving company|
|Contributions are tax-free||Contributions are tax-free to the employer; funds are not taxed as employee income||Triple tax advantage: includes funds deposited, interest and investment returns, and withdrawals for medical expenses|
|Typically none, but rules vary Employees can carry over up to $500 OR grace period of up to 2.5 months to use||Most accumulate from year to year but is at employer's discretion||Unspent funds rollover to next year and accumulate for use in retirement|
Compatibility with other savings accounts
|May be paired with an HRA or HSA||May be paired with FSA and HSA although there are specific requirements||May be paired with an HRA or FSA if limited to amounts over deductible or to dental/vision only|
What is a Health FSA?
A Health Flexible Spending Account (also known as a flexible spending arrangement) is a special account employees deposit money into that they can use to pay for certain out-of-pocket health care costs.
Here are some of its key features:
- Funding: Employee-funded, though employers may also choose to contribute.
- Ownership: Employer-owned, but in employee’s name.
- Plan requirements: There are no plan requirements. This type of program can be paired with any medical plan.
- Eligible expenses: Medical, dental, vision, prescription and some over-the-counter expenses for employees and their dependents.
- Contribution limits: Employer can set limits subject to IRS requirements ($2,750 per plan year in 2020); Employers may elect a lower contribution limit.
- Portability: There is no portability, which means employees cannot take funds with them when they leave the company.
- Tax advantages: Contributions are tax-free. This effectively helps reduce taxable income and as a result lower an employee’s tax responsibility. Employers benefit by not needing to pay the employer portion of Social Security or Medicare tax on employee contributions to FSAs.
- Rollover: Rules vary at the employer’s discretion with a couple options available: Employees can carry over up to $500 to the following year OR employees might have a grace period of up to 2.5 months to use leftover funds.
- Compatibility with other savings accounts: May be paired with an HRA. If paired with an HSA, must be limited to amounts over the deductible (post-deductible FSA or PDFSA) or to dental/vision only (limited purpose FSA or LPFSA).
It’s worth mentioning that employers are more recently interested in exploring the LPFSA option. When paired with an HSA, LPFSAs can further reduce employee taxes and eliminate the need to use HSA funds for dental and vision. This allows employees to keep more savings in their HSA, which in turn can help retirement funds grow.
What is an HRA?
A Health Reimbursement Arrangement, or HRA, sometimes called a health reimbursement account, is an employer-funded, tax-advantaged health benefit used to reimburse employees for out-of-pocket medical expenses.
Here are some features associated with HRAs:
- Funding: Employer-funded; Employees cannot contribute.
- Ownership: Employer-owned. The employer can customize the HRA, determining how much they will contribute, what expenses are eligible and the rollover option. The employer controls the cash until a claim is filed by the employee for reimbursement.
- Plan Requirements: An HRA must be combined with a group medical insurance deductible plan.
- Eligible Expenses: Employer-approved health care expenses for employees and qualified dependents. Funds can only be used when medical expenses are incurred. Some HRAs allow for insurance premium payments.
- Contribution Limits: Employer-controlled. No specified amount. HRAs do not pay interest to participants.
- Portability: When an employee leaves, retires, or is released as an employee, the HRA funds remain with the employer.
- Tax advantages: HRA contributions are fully tax deductible to the employer. Funds contributed by the employer (as fringe benefits) are not taxed as employee income.
- Rollover: Most HRAs allow the funds to accumulate from year to year, although this is not required and is at the employer’s discretion.
- Compatibility with other savings accounts: May be paired with an FSA. If paired with an HSA, it must be limited to amounts over the deductible or to dental/vision only
What is an HSA?
A Health Savings Account (HSA) is an employee-owned bank account that is set up to offset the costs of a Qualified High Deductible Health Plan (QHDHP). You can check out our blog post on 7 things you should know about HSAs for more detailed information, but we've outlined the key features below:
- Funding: Employee-funded plan. HSA contributions can be made by the employer or employee, or both, subject to a maximum contribution established by the government.
- Ownership: Employee-owned.
- Plan Requirements: Must be linked to a qualified high-deductible health plan (QHDHP). For 2020, the minimum annual deductible requirement is $1,400 for self-only and $2,800 for family.
- Eligible Expenses: IRS-approved medical/vision/dental expenses for participants and qualified dependents; Funds cannot be used to pay premiums. Also, it should be noted that employees who use money from an HSA for anything other than qualified health expenses incur a 20 percent tax penalty, in addition to income tax that must be paid on the amount withdrawn. After age 65 these funds can be used for any expenses, tax free.
- Contribution Limits: Controlled by IRS. For 2020, contributions from all sources must not exceed $3,550 individual/$7,100 family. Any contributions an employer makes to an HSA become the employee's property and can't be withdrawn by the employer.
- Portability: The employee can take funds when leaving company.
- Tax advantages: A triple-tax advantage for the employee – funds are deposited tax-free (the account gets funded before your paycheck gets taxed), interest and investment returns are generated tax-free, and withdrawals are tax-free, as long as they are for health care expenses. Employers also enjoy payroll tax savings.
- Rollover: Unspent funds roll over to the next year; Funds may accumulate for years and be used during retirement.
- Compatibility with other savings accounts: May be paired with HRA or FSA if limited to amounts over deductible, or to dental/vision only.
More information on the employer’s guide to tax implications for fringe benefits for 2020 is available on the IRS website.
Which is better?
The answer is, “it depends.” There are so many factors to consider and what’s right for one employer/employee may not be right for another. Each of these options offers value to employers and employees in their own unique way.
There’s no doubt that employers may feel overwhelmed with the choices to determine what’s best for them. That’s why employers are encouraged to check with their broker or benefit consultant for options that may fit their specific need. Most health plans also have relationships with vendors to help administer these accounts. Brokers are encouraged to share this information with their clients’ as a vehicle to begin the conversation about these account options and how they fit into an employer’s overall benefit strategy.
Note: The information here is provided for general use only. You are encouraged to seek legal advice should you have any specific questions.