Everyone - employers and employees alike - know all too well that the world of healthcare coverage is confusing. As they say in the movies, “It’s complicated.” Yet despite the confusion, there's simply no stopping the trend towards consumer-driven healthcare coverage.
That’s why it's time to unpack the facts about workplace health spending accounts, otherwise known as Health Reimbursement Accounts (HRAs) and Health Savings Accounts (HSAs) - with a focus on how to view their costs and benefits.
Before we dive into the benefits of each one, let’s start with clarifying what they are.
HRAs come in many flavors, including Retiree HRAs, Stand-Alone HRAs, One-Person Stand-Alone HRAs, and Integrated HRAs, which are also known as Group HRAs, Linked HRAs, or Deductible-Only HRAs. For purposes of this discusion, we are talking about Integrated HRAs - those linked with a High Deductible Health Plan (HDHP).
This type of HRA is designed to help offset the cost of higher deductibles and is only offered to employees and their dependents who enroll in the group health insurance plan. Only the employer contributes to the HRA, and only the employer owns the account. An employer will typically set aside a dollar amount per employee per year that can cover some portion of group plan premiums, co-pays, and deductible expenses. This does not mean, however, that funds accumulate in a separate account; employers only pay after employees incur healthcare expenses.
If an employee’s medical expenses exceed the employer's HRA benefit, the employee pays the balance, and in some cases, an employer can set-up the HRA to pay after an employee meets their deductible, vs. beforehand. If, however, the employee stays healthy and underspends the allocated benefit, the unused funds may (but not always) roll over to the following year, depending on how the plan is set up.
Health Savings Accounts are financial accounts set up by either the employer or employee to also cover qualified medical expenses. They have been compared to employee 401(k) retirement accounts in that the account belongs to the employee but the employer and employee can both make contributions. Unspent funds can also be taken by the employee upon leaving a company.
To be eligible, the employee MUST enroll in an HSA-compatible insurance plan, referred to as HSA-qualified High Deductible Health Plan (HDHP) and they may not be covered by other types of health insurance.
What can employees pay for with their HSAs? Health insurance premiums, prevention programs, dental and vision care, and accident-related medical expenses. (Upon retirement, unspent HSA funds can be spent on virtually anything, though the funds then lose their tax-advantaged status.)
The Shared Benefits of HSAs and HRAs
There are two primary benefits shared by both HSAs and HRAs: that of tax deductibility and employee education/healthcare "consumerism".
Both employers and employees reap significant tax advantages from both programs:
- Employer contributions to HRAs and HSAs are both tax-deductible, meaning that employers are not taxed on these funds. Employers can weigh their tax gain against the costs of administering an HRA or HSA plan to understand the full financial impact of the program on the company, but generally speaking, employers find these related tax deductions to be a significant benefit.
- Employee contributions to HSAs can be deducted from an employee's personal tax returns, reducing their net earned income and associated tax burden.
Since unspent HSA contributions can be rolled over to the following year, both employers and employees benefit (no pun intended) when employees make vigilant choices regarding medical expenses. They also share a common interest in obtaining legitimate and necessary care to ward off more serious medical conditions.
HRA contributions, on the other hand, eventually get returned to the employer. Because of this, HRA plans are often times less effective than HSAs at helping companies manage cost, primarily because they don't do as good of a job at curbing (possibly unnecessary) medical treatments. The National Center for Policy Analysis Health Blog (NCPA) offers this:
“The American Academy of Actuaries (AAA) has long held that the economizing behaviors depend largely on to what extent employees view the money as their own. HSA funds clearly belong to the employee and to no one else. HRA funds are always the employer’s money and may be spent solely on services that are covered by the employer’s health plan.”
Regardless, HRAs almost always do a better job than plans with low cost deductibles. Again:
- HSA rollovers return unused funds to employees
- HRA rollovers, on the other hand, eventually return unused funds to the employer
So Which Is More Popular?
HRAs are undergoing a bit of a resurgence, and are actually increasing in popularity, though not as quickly as HSAs. A 2015 survey of employers offering an HDHP found that 19% offered an HRA while 43% offered an HSA. Both of these figures were up from years' past.
According to BenefitsPro, “HRAs are making a comeback, most notably among smaller employers (2 to 100), large employers (5,000+), and any size groups with historically low utilization. Their appeal may also increase as they appear to have the least impact on the Cadillac Tax (which is now set to take effect in 2020) thresholds since actual claims versus potential claims paid from the HRA are expected to be used in the calculations, assuming the Cadillac Tax survives.”
As for HSAs, their continued growth in popularity no doubt comes from a greater understanding of how they function. Brokers, employers, providers, and employees have now had over 10 years to understand their triple tax advantages, flexibility of contribution structure, and their ability to better control costs. Their continued effect on behavioral change, however, is really contingent upon employee communication and education strategies.
So Which Is Better For My Business?
It all depends. There is tremendous variance among plan design when utilizing both HSAs and HRAs. Just to name a few, these variations include rollover options, employer contributions, funding limits, funding schedules and primacy of reimbursement.
This is where the guidance of an employee benefits advisor is critical. Only when an advisor can understand your overall goals and objectives can they (or should they) formulate a recommendation.
As an example, do you consider yourself a maternalistic company, who likes to think of yourself as always taking care of your people, no matter what? Or, rather, are you a company with margin pressure who needs to do something in the short term to bring down benefit expenses? Are you a company with retention issues, or are you a company enjoying tremendous workforce loyalty? Are the majority of your employees young and healthy, or older, and dealing with more health issues and/or approaching retirement?
All these factors, and many more, go into crafting an employee benefits strategy designed to meet your objectives. We'd love to help, so give us a call right away and we can get started on crafting the ultimate employee benefits program for you, your employees and their loved ones.