Over the past few years, enrollment in consumer-driven health plans continues to increase, indicating a move away from traditional options, such as PPOs and HMOs. Generally, consumer-driven health plans are the least expensive options offered by employers, giving employees more control over their health spending. Because of this control, these types of programs, providing at least a $1,000 deductible, deliver between a 17 percent and 21 percent reduction in overall health costs for employers.
Two common types of consumer-driven health plan options are the health reimbursement account (HRA) and the health savings account (HSA). From 2013 until 2018, enrollment in consumer-driven health plans with a savings arrangement, such as an HRA or an HSA, grew from 20 percent to 29 percent. Overall, 7 percent of companies offer the HRA while 22 percent offer an HSA.
So, what is an HRA and an HSA? How do they compare to one another? Let’s take a look.
A health reimbursement arrangement, or HRA, is established and funded solely by the employer, allowing employees to use this money each year to pay for out-of-pocket medical expenses, such as co-payments and prescription drugs. Employees do not contribute to an HRA. A certain dollar amount does not limit an employer’s annual contribution.
Any money contributed to your HRA is available for employees to use at the beginning of the plan year. To get reimbursed for health care under an HRA, the medical expense must be reimbursable. IRS Publication 502 lists certain medical expenses that are eligible for reimbursement under an HRA. However, employees also need to check the HRA’s plan document for rules and exceptions to payment, as employers can place additional limits on eligible expenses.
Each employer offering an HRA is required to document the HRA in a plan document and keep such plan on file. Under the Affordable Care Act (ACA), an HRA must be offered with a comprehensive, high-deductible health plan (HDHP). This is known as an integrated HRA. By providing an HRA alongside a health plan, an employer satisfies all ACA rules, thus providing a compliant plan. Employers cannot offer stand-alone HRA. Such an HRA violates the ACA’s annual limit rule.
An employer can design an HRA to cover only employees or employees plus dependents. The employee and dependents must be enrolled in the employer’s group health plan. The employer doesn’t have to fund the HRA until an employee incurs an expense.
If an employee has unspent funds in his or her HRA, then those funds may be rolled over to the next year, if the employer so elects. If there is no rollover election, then any unused amounts are forfeited at the end of the year. Additionally, HRAs aren’t portable, meaning an employee cannot take the HRA balance with them if they change jobs.
A health savings account, or HSA, is a savings account created by employees to pay for certain eligible health care expenses. If an employee participates in his or her employer’s HSA-eligible, high-deductible health plan that meets the requirements of the ACA, then that employee may establish an HSA.
Employees can contribute up to the annual amounts in an HSA. For 2019, the limit for a single employee is $3,500. For families, the limit is $7,000. These limits may be adjusted annually for inflation. Employers have the option of contributing to an HSA on behalf of each employee. However, these annual limits are the same no matter who makes the contribution.
Employee contributions to an HSA are made on a pre-tax basis. Further, if the employee uses the HSA funds to pay for certain eligible medical expenses, such as those found in IRS Publication 502, then the payments are not taxable. If an employee uses HSA funds to pay for a non-qualified medical expense, then the employee will be taxed on the payment amount and assessed an additional 20 % penalty, if the employee is 65 years old or younger. If the employee is over 65, and uses the HSA for a non-qualified expense, then the employee is only taxed on the payment. No additional penalty is assessed.
Depending upon the type of HSA established, the employee may invest his or her funds much like a 401k. HSA vendors may differ as to what minimum balance is required before investing. For example, some vendors may need a balance of $1,000 before investing where other vendors may require $2,500. Any earnings on investments are not taxed, and, thus, grow tax-free.
Finally, HSAs are portable. Because the employee establishes them, the employee may take the HSA with them if he or she changes jobs. Further, there is no fear of forfeiting HSA money at the end of the year if it’s not used. Instead, HSA balances roll over, year to year, whether the employee uses the money or not.
In a nutshell, let’s compare HRAs and HSAs.
If your business is considering establishing an HRA or an HSA, your Benefit Administration Company, LLC representative can help you decide which option is best for you and your employees. Learn more at our group benefit services page, or click here to set up a time to discuss.
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