Understanding HRAs, HSAs and FSAs

Take the time to figure out how different health care add-on programs can help you and your employees.

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So you’ve made the plunge and decided to offer health benefits to your employees. Or perhaps you’ve been doing that for a while, but now you’re looking at what revisions you might make.

In either situation, you’ll have a lot of decisions ahead. One is just which flavor you might pick from the alphabet soup on the health care plan menu: HSAs? HRAs? FSAs?

And if your head’s spinning already, read on. What are all these things? And how should you decide whether to include them — and if so, which one?

Definitions

Let’s take that first question first.

HSAs, HRAs and FSAs are three different ways of answering the same questions when it comes to health benefits.

The questions are: How do you keep benefit costs down? How do you enable employees to get broader coverage? And how do you engage them directly in thinking about how to spend their health care dollar?

Each of these programs is also aimed at helping employees make sure they aren’t taxed on the money they spend directly on health care. That’s an important benefit. While our annual income tax return allows us to take a tax deduction on our out-of-pocket health care spending, we only get that deduction if we spend at least several hundred dollars.

HSAs, HRAs and FSAs are all ways that enable people to ensure their out-of-pocket medical spending is tax-free from the first penny.

“It helps to hold down the employer’s cost (for health benefits) if they can pass some of that cost to the employee,” says Julie Stich, director of research for the International Foundation of Employee Benefit Plans, based in Brookfield, Wisconsin. And HSAs, HRAs and FSAs are all ways of making sure employees take part in paying for their health care while at the same time providing a financial cushion.

So what do all those letters stand for?

Flexible spending accounts (FSAs) are the oldest of the three. They allow employees to set aside a fixed amount of their pay before taxes into a special account.

To cover a health care expense not already covered by insurance — such as a deductible or a copayment, or expenses for medications and certain other health-related products — the employee taps the FSA. You can see a list of the expenses that qualify for payment through the FSA at the IRS website.

A tricky aspect of FSAs is that if there’s money left over in the account at the end of the year, you can’t keep it and you can’t roll it into the account for next year; it’s truly a “use it or lose it” system. To avoid leaving money on the table, employees have to make a careful calculation as to how much money they are likely to spend over the year on those unreimbursed health care costs.

Health reimbursement arrangements (HRAs) provide employees with tax-free dollars to cover various medical expenses.

One difference is that HRAs don’t use the employee’s money — instead, the employer pays money into the HRA on the employee’s behalf. The employee can use that money tax-free to cover various expenses that crop up and aren’t already covered by the insurance plan.

If money is left in the HRA at the end of the year, it can be rolled over for the next year, Stich says — that’s up to the employer. But rolling the money over isn’t required; untapped balances can simply revert back to the company.

Health savings accounts (HSAs) have much more flexibility than either FSAs or HRAs, but they also come with strings attached of their own.

HSAs are funded mostly by employees through a payroll deduction — although they can get contributions from other sources, including employers.

(Usually. Sometimes people transfer money that has already been taxed into an HSA; in that case, they get the tax benefit in the form of a reduced overall tax bill when they file their tax returns and declare the payment to
the HSA.)

A big difference is that, unlike HRAs and FSAs, owners of HSAs get to keep the money from year to year, assuming they have a balance at the end of the year. More on that in a moment.

What are the differences?

All three kinds of accounts require a health plan in place first, Stich explains. But only HSAs place strict limits on what kind of health plan it must be.

“HSAs need to be put in place in conjunction with a high-deductible health plan,” Stich says. To qualify as an HDHP under the law, the policy must have a deductible of at least $1,300 for single-individual coverage and $2,600 for family coverage.

HDHPs are becoming more popular with employers basically because they have much lower insurance premiums. With them HSAs are becoming more popular as well.

An FSA or an HRA is literally under the control of the employer (often delegated to a third-party consultant or institution), while an HSA is under the employee’s control. Employees whose banks or financial institutions offer HSAs can simply take their documents showing that their insurance plan qualifies over to the bank, sign up, and then arrange for automatic deposits to the HSA. The HSA can earn interest like any other investment; accounts can be placed in federally insured bank accounts or in uninsured — but often more profitable — investment accounts.

HSAs also tend to be more popular with employees. According to the Employee Benefit Research Institute, health plans that qualified for HSAs had enrolled about 17 million policyholders and their dependents as of the end of 2014.

Some employers offer employees a choice between an FSA or an HSA, but for many the HSA-eligible insurance plan is the only option anyway.

HSAs have another reason for being popular, though, Stich notes: The account holder can keep the money even after retirement and can keep using it to pay medical expenses that aren’t otherwise covered. Additionally, HSAs that have substantial funds in them can become an additional source of post-retirement income for their account holders — although it’s important to carefully follow the rules about how to convert them to that purpose.

Get help

For every employer, figuring out which of these options, if any, will be best for your business and your workforce requires the advice of a professional who knows your company inside and out. There are a raft of consultants and other professionals who can advise you on which of these programs will be best suited to your workforce, your business and your business conditions.

But don’t let that intimidate you from delving into the subject. Programs like HSAs, FSAs and HRAs have become a key part of our health insurance calculations, and that’s guaranteed to continue through the next decade. So take time to immerse yourself in the ABCs of all of these programs so you can become that much better prepared to reward your workers while holding down your health care costs in the years to come.



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