When it comes to reimbursement accounts, the differences can be confusing. Between Healthcare Flexible Spending Accounts (HCFSAs), Health Savings Accounts (HSAs), and Health Reimbursement Arrangements (HRAs), how do you know which to offer employees? How do you determine which type pairs best with your health plan offering(s)?
Likely, you know that, in general, reimbursement accounts offer tax benefits and a way to pay for eligible medical expenses with money that has been set aside.
Still, the accounts may run together. Let’s try to clear up some confusion on the account types and look at which account is most appropriate for sample healthplans.
Healthcare Flexible Spending Account
An HCFSA is a tax-advantaged account that allows employees to save for eligible healthcare costs for the current plan year. Employees and the employer may contribute to or “fund” the account.
What you need to know:
- Can be paired with a High Deductible Health Plan (HDHP) or a PPO
- Full election amount is available first day of the plan year
- Election changes (or adjusting contribution amount) require a qualifying event
- “Use or lose” applies
- Account stays with the employer if the employee terminates employment
Health Savings Account
An HSA is an individually owned, tax-advantaged account that allows employees to save for eligible healthcare costs now, and into the future.Employees and the employer may contribute to or “fund” the account.
What you need to know?
- Must be paired with a qualified HDHP
- Triple tax advantage: money goes in tax-free, savings grow tax-free, and withdrawals are tax-free if used for eligible items
- Account stays with employees, even if they change jobs
- May adjust contribution amount at any time (subject to employer’s plan)
- No “use or lose” rule - save what’s not spent
- Generally, an employee can invest savings for growth, just like a 401(k)
Health Reimbursement Arrangement
An HRA is a tax-advantaged account that is generally used to help employees pay for healthcare expenses and help offset certain out-of-pocket costs not covered by the employees’ major medical plan. The account is 100% employer funded.
What you need to know?
- Contributions are non-taxable to employees
- May have a Rollover and/or Run off period
- Does not have to be paired with a qualified HDHP, but it does have to be paired with the employer's medical plan
- Offers a multitude of plan design options, allowing employers to control the total cost of offering the HRA
- Since HRAs are not required to be pre-funded, employers can decide to pre-fund or to pay only when an employee files a claim
Choosing the Best Plan for Your Needs
The good news is, no matter your situation, there is a tax advantaged reimbursement account that can work for your employees. By asking yourself the following question, you can help determine the best fit for your business.
What issue are you trying to solve?
- Want to offer a benefit that saves for the future. Consider an HSA.
- Want to offer an employer paid benefit that reduces out-of-pocket health costs today. Consider an HRA.
- Looking to allow employees to save pre-tax for out-of-pocket health costs - offer an HCFSA.
This chart may also help you and your employees understand some of the high-level account differences.
If American Fidelity Assurance Company is your benefits provider and you’d like further education on account types, contact your local account manager. If you don’t currently offer a Section 125 Plan and are interested in getting one set up, contact us. We’re here to help.