What to Consider When Choosing a Health Benefits Account
According to the Kaiser Family Foundation, approximately 156,199,800 Americans receive health coverage via employer-sponsored plans.
In other words, every year nearly half the U.S. population has to choose what it perceives to be the best plan for its needs. As a result, employees have to analyze not only which health plan to choose but what the accompanying type of benefit account should be, which can be quite daunting.
The three most common types of health benefit accounts are Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs). These accounts are designed to help employees cover a range of out-of-pocket medical expenses.
Flexible Spending Accounts
Flexible spending accounts allow employees to deposit pre-tax earnings into an account that can be used to pay for a host of out-of-pocket medical expenses, including co-pays, deductibles, and some prescription drugs. They can help employees save as much as 40% on their taxes, while employers benefit from savings of 7.65% from the matching FICA.
There are two types of Health FSAs, namely medical and limited purpose. Medical FSAs enable employees to cover out-of-pocket medical, dental, and vision expenses. Limited-purpose FSAs are only used to pay for dental and vision expenses that are not insurance-eligible and are usually offered as an additional option when an HSA is provided on a Qualified High Deductible Health Plans.
An FSA is “use it or lose it,” meaning the funds in the account are forfeited if they are not used within the plan year. However, some employers offer a grace period of up to 2.5 months or allow employees to roll over up to $570 (2022 limit) of their funds into the next plan year.
Health FSAs limit contributions to $2,850, plus any rollover amounts.
Health Savings Accounts
Health Savings Accounts can be used to cover a range of medical expenses and are only available to employees enrolled in a qualified high-deductible health plan.
Unlike FSAs, HSAs are not “use it or lose it” accounts. Instead, the funds in the account can be carried over from year to year. In addition, the accounts’ earnings are tax-free, and withdrawals for qualifying medical expenses are also tax-free.
Employees contribute to their HAS through pre-tax payroll deductions, which allows them to save on taxes. The annual contribution limit for HSAs is $3,650 for individuals and $7,300 for families. HSAs also allow individuals aged 55 or older to make an additional $1,000 “catch-up” contribution.
Health Reimbursement Arrangements
Health Reimbursement Arrangements are employer-funded accounts that reimburse employees for out-of-pocket medical expenses up to a specific amount every year. Like HSAs, the money in HRAs can be carried over from year to year, and these accounts are generally provided with high-deductible plans.
The main difference between an HSA and an HRA is that the latter is funded by the employer and subject to their rules, while the former may be funded by the employee and/or employer and is subject to IRS rules regarding the amount of contribution. Eligible medical expenses are determined by the IRS but may be restricted by the employer. Employers also determine if contributions are allowed to rollover to the next plan year or not.
HRAs are also available as Voluntary Employee Benefit Accounts (VEBA). With HRA VEBAs, employers place contributions into a trust account on behalf of their employees, and once deposited belong to employees. Unused funds stay in the employees’ accounts and may be invested or earn interest, and may also rollover. The contributions are then used to reimburse employees for qualifying out-of-pocket medical expenses, ensuring employers can provide their employees with savings when needed.
Factors to Consider When Choosing a Health Benefit Account If an employee opts for an FSA, they should consider how much they plan on contributing and be mindful of its “use it or lose it” nature. Employees also need to consider ease of access to the funds and whether their employer offers a grace period. It’s crucial for employees to be aware of what is and is not eligible for reimbursement.
If an employee opts for an HSA, they need to enroll in a qualified high-deductible health plan, keeping in mind the plan’s contribution limits and if they want a portable HSA. If their employer offers an HRA, the employee will likely be enrolled in a high-deductible health plan, but HRAs are allowed for any health plans. Employers set the rules that govern these accounts and, as such, employees should understand how the account can be used, what it covers, and what happens to the money at the end of the year or if they leave their job.