Health Savings vs. Health Reimbursement

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Palm leaf with text "HSA vs HRA Healthcare Options for Employers."

 

You know offering health care to your employees is important, but do you know which plan is the best one to offer? In the debate of health savings accounts vs. health reimbursement agreements, how do you know which is the best option for your business? The answer, of course, depends on your employee’s needs.

Before you can choose, you need to understand both. Both options stem from the same philosophy, which is to provide members with affordable healthcare coverage that gives financial support to help them pay for their healthcare expenses. They’re designed to give members the information and resources they need to help them make informed healthcare decisions for themselves and their families while helping lower employer costs.

Breaking Down Health Savings Options

Typically, there are several different ways to offer health savings plans. In this blog we are going to break down the differences between  a Health Savings Account (HAS) add Health Reimbursement Account (HRA.)  Both have benefits and drawbacks for employees and employers and it is important to understand the differences.

What is an HSA and How Does it Work?

A Health Savings Account (HSA) is a type of personal savings account employees can set up to pay certain health care costs. An HSA allows employees to put money away and withdraw it tax-free, if they use it for qualified medical expenses, like deductibles, copayments, coinsurance, and more.

HSAs are accounts to which employees and employers can contribute money. However, employees are eligible to contribute to an HSA only if they have a qualifying high deductible (HDHP). As employers, you can offer an HDHP with an HSA as a workplace benefit.

With an HSA, employees reap the tax benefits. They can leave their HSA money invested from year to year, and it will grow tax-free if they don’t take it out to pay for healthcare expenses. Also, the HSA is theirs to keep even if they leave your company. However, if they withdraw funds for anything other than healthcare costs and they’re younger than 65, they’ll pay a 20% tax penalty on the money.

The IRS establishes the rules for what counts as HSA-eligible expenses. This includes most medical and dental expenses, eye care, and hearing aids.

The Benefits Of a HSA

The beautiful thing about an HSA program is that it gives employees more control. Employees can own and control their HSA, giving them more freedom and flexibility in managing their accounts.

  • Employees have the option to open an HSA without an employer if they have a qualifying high-deductible health plan.
  • Employees can contribute money to an HSA up to the annual contribution limits. They don’t have to rely on you to make contributions.
  • HSAs provide triple tax benefits. Contributions are tax-deductible in the year they make them, money invested in their HSA grows tax-free, and the money in their account can be withdrawn for qualifying medical expenses without owing taxes.
  • HSAs are not using it or losing it. They can keep their money even if they don’t spend it during the year.
  • The IRS also allows employers to recover mistaken HSA contributions.

The Challenges of a HSA

  • There are relatively low annual contribution limits to HSAs.
  • Employees may have a limited choice of investment options within their HSA, which limits the potential returns they can earn.
  • Employees can contribute to an HSA only if they have a qualifying high-deductible health plan.

Breaking Down Health Reimbursement

Individual Coverage Health Reimbursement Arrangements (ICHRAs) or (HRA) are employer-funded group health plans from which employees are reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year. Unused amounts may be rolled over to be used in subsequent years. The employer funds and owns the arrangement. This is the key difference between an HSA and an HRA.  One is owned by the employee, one is owned by the employer.

Quote from IRS.Gov "An HSA may recieive contributions from an eligible individual or any other perosn, including an employer or a family member, on behalf of an eligible individual."Employees are not taxed on the money you put in their HRA, but they also cannot invest the money. This is another key difference between HSA and HRA accounts.  They can only withdraw it for eligible medical services and will lose it if they leave your company unless they choose COBRA continuing coverage. As an employer, you may allow unused funds in an HRA to carry over and be used in subsequent years, but it’s not required, and you can set the rules for what care they can pay for using HRA funds.

With an HRA, employers reap the tax benefits since the company is the party contributing money.

The Internal Revenue Service (IRS) also allows employers to reimburse any medical expenses from an HRA that would be deductible. However, you have the freedom to set more narrow requirements.

 

The Benefits of a HRA

  • Employers contribute money to an HRA to help cover employee health costs. Employees don’t have to make their own contributions, and, in fact, aren’t allowed to put their own money into the account.
  • There’s no maximum annual limit on how much employers are allowed to contribute to employees’ HRAs.
  • HRA money can help employees pay for qualifying healthcare expenses, thus reducing their out-of-pocket costs.
  • Money you put into your employee’s HRAs is not taxable for them.

The Challenges of an HRA

  • Employees can’t contribute to their HRA, so they’re reliant on you as their employer to put money in.
  • Employees will lose their HRA money if their leave unless they elect COBRA coverage.
  • Money in an HRA cannot be invested and grow year to year.

What Your Decision Means for You and Your Employees

If you’re choosing between an HSA or HRA, wondering which is better for employees, and weighing the pros and cons to your business, know that either one sends a clear message that you care about your employees’ health and well-being. That said, there are pros and cons to each. Understanding your employees’ needs can help you decide how to structure your health benefits package.

An HRA is attractive because it removes any financial burden an employee may face in making contributions. All contributions are up to you (the employer), and access to these tax-free funds can provide much-needed relief to an employee’s out-of-pocket health care costs including vision and dental expenses. Meanwhile, an HSA can be a valuable tool that extends beyond healthcare needs, and a mechanism that can help employees begin to save for retirement. One drawback of an HSA is its restrictions on contribution limits and investment options. These parameters may not be an issue for some employees but may be a source of frustration for others.

Graphic comparing an HSA vs HRA with bullet points from the article.

Conclusion:

Offering health care benefits is complicated, but it is essential. With so many options out there for employers it can be difficult to navigate all the choices.  Finding the best solution for taking care of your workers, ensuring productivity and a positive work environment, and attracting new, high-performance talent is the ultimate goal.

Not every option is right for everyone.  That is why our AUI team is here for you when choosing a plan.  With a little help, we can assist you to put a healthcare plan together. Don’t get frustrated and settle for something you are not sure of.  We’re here to help you make those hard decisions and implement them with ease!

Contact us today to learn more!

 

ADDITIONAL READING:

IRS Issues Final Rule on Pay or Play and Nondiscrimination Rules for ICHRAs

ICHRA Plans and Small Businesses

 

We do more than cover small businesses and individuals with the right insurance policies and benefit plans – what motivates our team is helping you save more so you can invest more in your team, family, and goals.

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