HSA vs. HRA vs. FSA
With so many acronyms being thrown around in today’s Health Care debates, it’s hard to keep the alphabet soup straight! What follows is an easy-to-understand comparison between the three types of plans that are saving both employers and employees more and more money each year. Three of the most popular and successful ways of saving are:
- The Health Savings Account (HSA)
- The Health Reimbursement Account (HRA)
- The Flexible Spending Account (FSA)
Let’s first review the newest member of the “Soup”: the HSA.
An HSA is a bank account, owned by an individual or employee, designed to supplement a High Deductible Health Plan (HDHP), such that any qualified medical expenses can be paid with money that is free from federal taxation.
The HSA belongs to individuals; the money remains theirs even if they do not spend it. In fact, not only does it remain theirs, it even may gain interest! HSA interest or investment earnings are not taxable, unless taken out for non-medically related items.
- In 2008, the maximum HSA contribution for an individual is $2900, and for a family $5800, regardless of the plan deductible. People between the ages of 55 and 65 may contribute an additional $800 per year.
- Since 2006, contributions may be made up to the annual allowed limit, regardless of when the HDHP goes into effect. If an individual or employer changes to an HDHP in November, the full amount of $2900 (single enrollee) may be put in for the current year and again the full amount may be put in the next year. Health Plan deductibles re-set every January 1.
- Contributions to the HSA may vary as often as the account-holder needs.
Contributions made to the HSA are free from Federal Taxation unless taken out for non-medical (or dental or vision) purposes.
Individual Medical Insurance may also utilize the HSA. A family or individual may purchase a High Deductible Health Plan (HDHP) and establish an HSA account with a participating bank. Deductions to the HSA are an “above the line” tax deduction.
An HRA is a Group Medical Insurance plan, comprised of three basic parts:
- Employer Arrangement, often referred to as “self-funded portion”
- Bridge, often referred to as “employee’s responsibility”
- Group Medical Benefits, or the Insurer’s medical plan
HRAs allow a company to fund claims expenses that its employees incur. It’s a way for the employer to enter the self-insured arena with minimal risk. HRA-compatible Group Health Plans have high deductibles that result in lower premiums; the employer uses the savings to help employees fund deductibles when used.
The greatest benefit of HRA plans is that they allow the employer to customize the coverage of the Group Medical Insurance to the needs of his/her employees, without incurring prohibitive expenses. These plans often result in lower annual costs for Employers because statistically, only 20% of employees use and/or exceed annual medical expenses over $800.
Individual Medical Insurance is not compatible with the HRA concept, however even very Small Group Health Insurance programs can benefit.
A Flexible Spending Account, or FSA, is a pre-funded account that can be used to pay for a variety of expenses. Employees choose each year how much to set aside per pay period into the account, usually with limits set by the employer and/or the IRS.
There are two basic kinds of Flexible Spending Accounts
- Un-Reimbursed Medical Expenses
- Daycare Costs
- Transportation cost funds are a lesser-used account
The Medical FSA is an Employee Benefit that allows the enrolled employees to use pre-tax dollars to pay for medical expenses not covered by insurance, coinsurance demanded by the Group Health Insurance, or Over The Counter (OTC) medications. The IRS has designated a wide variety of expenses, including dental and vision, as allowable for reimbursement through the FSA. These same expenses are eligible for the HSA plans. Recent inclusion of the debit card for the FSA has greatly simplified this procedure, and eliminated a great deal of paperwork, making the FSA vastly more approachable and appealing.
Daycare Flexible Spending Accounts are designed with a $5,000 maximum annual contribution, and are designed to allow employees to pay for the day care of their dependents, most commonly their children, but also for senior citizen dependents that live with the employee, such as parents. The Daycare FSA may not be used to pay for summer camp, or Long Term Care for dependent adults that may live elsewhere (such as a nursing facility or home).
Unlike the HSA or the HRA, an FSA does not replace a traditional Group Health Insurance plan. It is designed to supplement and add greater benefits to the plan, not to supplant it.
Also unlike the HSA or the HRA, any money put into an FSA that is not used by the end of the plan year, will be returned to the employer. Employees often refer to this restriction as the “Use it or Lose it” clause.
A potential drawback to the FSA, from the employer’s view, is that employees may access their Un-reimbursed Medical Account for its full annual amount the first day the account is opened. If they decide not to come back to work, the employer cannot legally go after those funds.
