HSA or HRA?

Health Savings Accounts, or HSAs, has aggressively been promoted as one solution to the high cost of healthcare. However, more employers are discovering that Health Reimbursement Arrangements, or HRAs, are a better solution. Why? The HRA will cost companies less than an HSA; it’s simple economics.

With the Health Savings Account, or H.S.A, the employer offers a qualifying health plan with a minimum $2,000 deductible for families and a maximum deductible of $10,200. If the employer wants to cushion the effect of this new high deductible to the employees they must do so by making comparable contributions to all employees’ HSA bank accounts, either in a lump sum or in monthly installments. From the employer’s prospective, that money is spent even if the employee does not incur any deductible expenses. Only 25% to 30% of employees will have a claim that could be applied to the deductible. The HSA comparable contribution rule, the employer is required to fund every HSA account with the same amount. So where is the savings to the employer? It all went into employee health savings accounts. Employees who spend HSA funds for expenses other than healthcare will pay taxes and a 10% penalty. Employers are quickly realizing their healthcare dollars will be funding all types of expenditures.

In contrast, the HRA offers the employer much more design flexibility. There are no rules about minimum and maximum deductible amounts; there are no comparability rules where the employer must give every employee the same amount of money; and the employer retains full control over the funds in the company’s general asset account and only fund claims as they occur. For example, the employer wants to reduce premium cost by increasing the health insurance deductible from $500 to $1,500. The employer also wants to help cushion the effect of the new higher deductible to their employees. With the HRA the employer establishes the required Plan Document and distributes an SPD informing employees that the company has established an HRA that will reimburse deductible expenses in excess of $500 from $501 to $1,500, or up to $1,000 annually. The employer reduces the cost of health insurance and uses a portion of the savings to cushion the effect of the higher deductible to their employees. And, with the HRA, only those employees who actually incur a deductible expense in excess of $500 receive HRA funds. At the end of the plan year any unused funds revert back to the employer as those employees were not affected by the new high deductible plan. Although rollover of unused funds is allowed under an HRA most employers don’t elect to do so with this type of Deductible Gap HRA.

How Employers Utilize a Health Reimbursement Arrangement (HRA)

Expenses not reimbursed by health insurance are one way employer groups are utilizing HRAs. With an HRA, the employer funds an account from which the employee is reimbursed for qualified medical expenses, such as co-pays, deductibles, vision care, prescriptions, long-term care, medical insurance, chiropractic care, and most dental expenses. Over-the-counter drugs that are medically necessary may also be reimbursed through an HRA. Reimbursements from the HRA are not taxed to the employee, and are deductible by the employer.

The most common use of an HRA is in combination with a High Deductible Health Coverage (HDHC) Plan. HRAs can enhance a company’s benefit package while helping to contain costs and boost employee morale. For example, you can combine your HRA with a higher-deductible health insurance plan. The employer benefits from reduced insurance costs, but the effect to the employee is cushioned with an HRA.

HRA Plan Design Flexibility

HRAs provide employers with a lot of flexibility in Plan design. Limits can be set on types of services reimbursed by an HRA. Amounts contributed to an HRA can be in a lump sum or in increments throughout the year. This is in contrast to a Section 125 Medical FSA where the employer can be liable for the full amount on the first day of the plan. You can also choose to carry over unused HRA funds to the next plan year, or have all or a portion of the unused HRA funds forfeited at the end of the year.

HRA accounts can pay the same expenses as a Section 125 Medical Reimbursement Flexible Spending Account (FSA), however, unlike an FSA only employers can contribute to the HRA.

In contrast to the “use-it-or-lose-it” rule of cafeteria plans, the employee gets to carry forward any unused HRA account funds. Depending on the HRA design options elected by the employer, their employees may request reimbursement for medical expenses at the time services are rendered, accumulate them for reimbursement in the future, or save the funds in the HRA for retiree health benefits.