If you are opening a business and wish to provide your employees with comprehensive health coverage, you have probably realized by now that it’s not just about the health plan you choose. In fact, in addition to the health plan you offer employees, there are other options you can offer that will help them pay for medical expenses not covered by their health plans. These usually come in the form of a Health Savings Account (HSA), a Health Reimbursement Arrangement (HRA) and a Flexible Spending Account (FSA).
Health Savings Account (HSA)
A Health Savings Account, or HSA, is similar to a 401(k) retirement plan, except that instead of depositing money into an account for retirement, you deposit money into an account for medical expenses. Employees can only open an HSA if they are enrolled in an HSA-compatible health plan, sometimes referred to as a High Deductible Health Plan, which must meet the following criteria:
- The plan must have an annual deductible of at least $1,200 for individuals and at least $2,400 for families.
- The sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan (not including premiums) does not exceed $5,950 for individuals and $11,900 for families.
Employer contributions to HSAs are tax deductible, and both employers and employees can contribute to them. Employees can usually take these accounts with them even if they leave their jobs.
Health Reimbursement Arrangement (HRA)
A Health Reimbursement Arrangement, or HRA, may sound like an HSA but it is quite different. An HRA is a fund set up by a company for reimbursing employees for out-of-pocket medical expenses that are not covered by their health plans. Employer contributions to HRAs tax deductible for the employer and tax-free for employees. Only employers can fund an HRA, and there is no limit to how much they can contribute. The difference between an HRA and an HSA, however, is that employees only need to pay if the employee has medical expenses; it is a pay-as-you-go system, not an account with prepaid premiums, like an HSA.
Flexible Spending Account (FSA)
A Flexible Spending Account, or FSA, is tax-free and is set up and owned by an employer on behalf of the employee. Even though ownership rests with the employer, employees decide which eligible medical expenses they can use the funds for. An FSA is called “flexible” because it works with most employer-sponsored health plans, both employees and employers can contribute to the account.
Employees can deposit up to $2,550 into an FSA each year (the funds are deducted from the employee’s salary, but they are not taxed). The money must either be used up by the end of the plan year, or employees can be given a “grace period” for 2.5 months or be able to carry over up to $500 per year for the next year. The employer decides which options to offer employees.
Not sure which is best for your company?
In general, HSAs are thought to benefit employees more than HRAs. Conversely, HRAs are usually thought to benefit the employers more. Of course, every company is different, so if you are not sure which health account(s) you might wish to offer your employees, Corporate Financial can help you clarify the most cost-efficient plan for your company.