One of my favorite things to do in my job is help brokers and employers find the right solutions to meet their goals. Each “alphabet soup” program has its own unique features, benefits and potential detractors. There is no one-size-fits all.
I frequently get asked about the differences between Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). I thought it would be useful to put together a list of pros and cons of each program. This is not meant to be an exhaustive list, but a streamlined overview to help a broker and employer start a conversation to identify a strategy that best fits their needs.
Call me crazy, but let’s get the cons out of the way first. It might help you narrow your options more quickly.
Cons
Flexible Spending Account:
For employees:
- It’s generally the use-it-or-lose-it plan. An employer can add some additional features to the plan (at an additional cost) to protect the participant from losing as much money as they potentially could (i.e. a 2.5-month grace period or $500 carryover feature), but if the participant still has money in the plan when their time is up, they lose it.
- All claims must be adjudicated and ineligible expenses will not be reimbursed.
For employers:
- The Health FSA election is made available to the participant on day one of the plan (considered a pro for the employee). There is a chance a participant may be reimbursed more than they contributed to the plan and then terminates employment. There is nothing you can do to deduct the difference on the final paycheck.
- Must pass annual non-discrimination tests. Often highly compensated employees are limited in their participation.
- The Health FSA is a COBRA eligible benefit for those who have under-spent their accounts.
Health Reimbursement Arrangement:
For employees:
- Claims backup typically requires submitting an Explanation of Benefits form from the insurance company. Employees may feel they do not understand how to read an EOB to determine if they are eligible for reimbursement.
For employers:
- It’s a COBRA eligible benefit. You must offer it to ex-employees and if they decide to pay the premium for this benefit, you’re on the hook to reimburse ex-employee expenses.
- Funded accounts that roll over from year to year are hard to eliminate when participants have big unused balances.
- HRAs that offer $5,000 or more per individual per year require Medicare Secondary Payor (MSP) reporting (more costly to administer due to challenging reporting requirements!).
Health Savings Account:
For employees:
- Recordkeeping for eligible expenses are the responsibility of the participant. Unfortunately, participants are often horrible recordkeepers and don’t keep receipts in the case of an audit by the IRS.
- Only allowed with enrollment in an HSA-qualified high deductible health plan.
- Employees with Tri-Care, Medicare or a spouse enrolled in a Health FSA makes the employee ineligible to open an HSA bank account.
For employers:
- Employer contributions belong to the participant the moment you put it in their accounts. They take it with them when they leave employment.
- Must offer an HSA-qualified high deductible health plan.
- Employees with Tri-Care, Medicare or a spouse enrolled in a Health FSA makes the employee ineligible to open an HSA bank account.
Now let’s look at the pro’s.
Pros
Flexible Spending Account:
For employees:
- The Health FSA election is made available on day one to the employee. Employees will begin to plan expenses based on balance available and enjoy this benefit every single year knowing the money is there for them even if they have not funded the account yet.
- Employees with children in daycare will enjoy greater tax savings through this plan over utilizing the dependent care credit on their tax return.
For employers:
- Can be funded completely by the employee through payroll deductions or a combination of both employee and employer contributions.
- For every dollar contributed by the employee, the employer does not have to pay the 7.65% FICA match (hopefully the tax savings pay the cost of administering the plan!).
- A third-party administrator will adjudicate every claim. Because only eligible claims will pass through the plan, the plan should pass an audit easily.
Health Reimbursement Arrangement:
For employees:
- It’s employer only money, typically used to fund deductible and coinsurance expenses.
- Can be used with a high deductible health plan, which has a lower premium expense.
For employers:
- A popular design is to reimburse employees for deductible expenses. I call it a “promise to pay” account where an employee must incur a deductible expense to generate a reimbursement. If expenses are low, the employer saves money.
- Both the employer and employee save money with a high deductible medical plan keeping premium’s low while self-funding part of the out-of-pocket expenses.
- Non-discrimination testing will seldom limit employee participation.
Health Savings Account:
For employees:
- HSA-qualified medical plans are typically less expensive than traditional medical plans.
- Employees are challenged to be wise consumers of healthcare dollars when they spend money on medical, dental and vision expenses.
- Money contributed by the participant to the HSA-qualified bank account is tax-free (Federal, Social Security and Medicare). Money withdrawn by the participant is tax-free (Federal, Social Security and Medicare). Retirement accounts are not that generous!
- Money in their account is theirs. If they terminate, it goes with them.
- Money rolls over from year-to-year and can be saved to fund health care expenses in retirement.
For employers:
- Must be used in conjunction with an HSA-qualified high deductible health plan which have lower premiums.
- Employees are responsible for their own recordkeeping of eligible expenses.
- Participant accounts can pay administration fees.
Now that we’ve outlined the pros and cons of each program, let’s take a quick minute to broadly identify the type of client who might benefit most from each program:
Program Profiles
An employer with an FSA typically:
- Wants the ability for the employer and/or the employees to be able to contribute to the plan.
- Has lower turnover to avoid ex-employees getting use of employer funds and COBRA eligibility.
- Has lower paid employees who will contribute to the plan to allow the plan to pass non-discrimination tests.
An employer with an HRA typically:
- Wants to provide an employer sponsored benefit.
- May have a generally healthy employee population that won’t use all their available benefit.
- Has lower turnover to avoid COBRA eligibility.
An employer with an HSA typically:
- Has an employee base who can afford to contribute to the plan.
- Has well-paid employees who understand the tax savings potential using this vehicle for retirement savings.
- Wants to keep premium costs lower through use of an HSA-qualified high deductible health plan.
- May have higher turnover as there is no COBRA eligibility burden for the bank account.
- May want employees to cover the costs of administration.
Keep in mind, all of these plans can be used in combination if there are specific goals an employer is trying to achieve.
If you have a client looking to implement a program, or review their current offering, I would be happy to work with you to discuss the type of program(s) that will best suit your client needs. Always feel free to contact me with your questions.