There are several benefit types that employers can offer their employees to help them manage out-of-pocket medical expenses. A few of the more popular choices include Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs,) and Flexible Spending Accounts (FSAs,) which all give companies control over the cost of insurance while still providing a valuable benefit for workers. Today’s companies are finding greater control, flexibility, and affordability with HRAs, HSAs, and FSAs as they return to normal in a post-pandemic economy.
These benefits have plenty in common, including the tax-free cost savings and limits on annual contributions. But as a human resource manager or business owner, you may be more interested in understanding the differences between these particular benefits options. Today, we’ll highlight three of the biggest to help you decide which is best for your company platform.
1. Ownership and Portability Differences
One of the most pivotal differences between the health savings account (HSA,) the health reimbursement arrangement (HRA,) and the flexible spending account (FSA) involves ownership, portability, and control. Here is how each breaks down in terms of account setup and management. From the business perspective, it will help to review which of these fall under your control and which are fully portable for the employee.
HSA: The HSA is owned, overseen, and managed by the employee. An HSA is portable, making it attractive to staff members. This means that an individual can take his or her HSA should he or she leave the job. Any funds available can continue to be used between jobs and upon onboarding with a new company. If an individual is later covered by a qualified HDHP, they can resume making contributions to their HSA.
HRA: An HRA is entirely owned and managed by the employer. An HRA is not portable; the employee loses this benefit when they leave the company. Government rules, which employers may refine further, determine which expenses can be reimbursed for employees.
FSA: FSAs are employer-owned benefits, typically with a “use it or lose it” policy. FSAs are not portable. Since the account is owned by the employer, the individual cannot keep the FSA if his or her job status changes due to changing employers, job loss, or retirement.
2. Funding and Contribution Differences
There are critical differences in how an HSA, an HRA, and an FSA are funded. For example, who contributes and manages those funds? Here are the key financing details behind each benefit offering. These distinctions will be helpful as you review your company budgets and explore the most affordable benefits options for your teams.
HSA: With an HSA, the employee is primarily responsible for funding the account. The money is either payroll deducted pre-tax (which means it’s free from income tax and FICA taxes) or deducted from the individual’s income tax return. Employees may also deduct their contributions, depending on how they file. HRAs are also notable for their ability to accrue interest.
HRA: Because the employer owns the HRA, the employer is responsible for funding the reimbursements. The employer maintains the responsibility for funding and operational control over the arrangement entirely, from setup to reimbursement method. Should employees never file claims, or should they not use the full amount allocated by the company, the employer can keep the reserves, making it a great way to avoid wasteful spending on unused benefits offerings. HRAs are dedicated funds that cannot accrue interest over time.
FSA: Both employers and employees may contribute to a health FSA on a tax-advantaged basis. FSAs are usually processed by the employer, transferring funds that are deducted on a monthly basis from an employee’s paycheck. Typically, the employer “front-loads” the funds for employee FSA accounts. These are ideal for the employee when both sides can actively contribute, although FSAs do not have the ability to accrue any interest.
3. Requirement and Guideline Differences
The requirements and guidelines for each of these types of accounts can vary. In conjunction with IRS, HHA, and ACA Marketplace rules, before implementing any of these health benefits, you should understand the benchmarks in place. Depending on which offering you select, there will likely be documentation requirements, contribution caps, or set up rules in place.
HSA: Employees must have a qualified HDHP (high deductible health plan) to contribute to an HSA. They also cannot be enrolled in Medicare or Tricare, be someone else’s tax dependent, or have any kind of non-permitted coverage. Switching to an HDHP, and away from a traditional health plan, may affect or substantially lower your company’s health plan contributions, as well.
HRA: To be eligible to offer an HRA, your company should have fewer than 50 full-time employees (QSEHRAs and ICHRAs may offer more conducive provisions as an HRA variant depending on your company size, employee types, or budget.) Another requirement of the arrangement is that it must be offered on equal terms to all participating employees. Reimbursement amounts and limits can vary based on age and the number of covered individuals. And the ICHRA tends to offer the most flexibility in terms of establishing reimbursements and including a wider variety of employee types.
FSA: An employer can administer their own FSA, but a plan like this does require documentation to the Internal Revenue Service (IRS). It needs a Plan Document outlining the nature of the account and associated benefits. The IRS supervises and governs FSA arrangements, and there are mandates requiring this document to be in place.
If you’re considering your many company benefits options, these types of accounts can be great for your teams. Each offers a host of similarities and differences that may help sway your final decision. And it’s important to know that more and more companies are exploring the ICHRA solution specifically, with its increased flexibility and cost-controls, as well. If you’re still not sure how to move forward with your company benefits offerings or have additional questions about HRAs or ICHRAs, connect with W3LL!
We can help you identify the similarities and differences that matter most to you and offer solutions you need to implement the benefits platforms you need.