Health insurance can be confusing. Just look at health saving accounts, flexible spending accounts, and health reimbursement accounts. HSAs, FSAs, and HRAs are all used to pay for different health care costs and expenses.
While all these accounts are different, they do have commonalities. HSAs, FSAs, and HRAs are all created to help an employee control some of their health care dollars. Typically, an employer will compare these accounts and select one or two in an effort to help employees maximize benefits.
The Basics of HSA
So what is a health saving account? By definition, an HSA is a:
"A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit."
This means the account is linked to your health insurance if you're in a high deductible health plan. You can contribute money to the account with being subject to taxes.
The Basics of FSA
What about a flexible spending account? By definition, an FSA is a:
"A Flexible Spending Account (also known as a flexible spending arrangement) is a special account you put money into that you use to pay for certain out-of-pocket health care costs. You don't pay taxes on this money. This means you'll save an amount equal to the taxes you would have paid on the money you set aside."
Similar to an HSA, these flexible spending accounts put money aside to spend on out-of-pocket health care costs before taxes.
The Basics of HRA
Lastly, let's talk about health reimbursement accounts. By definition, an HRA is a:
"A Health Reimbursement Arrangement (HRA), commonly referred to as a health reimbursement account, is an IRS-approved, employer-funded, tax-advantaged employer health benefit plan that reimburses employees for out-of-pocket medical expenses and individual health insurance premiums."
So the main difference between an HRA and the other accounts stems from where the money comes from. Usually, the money in an HRA comes directly from the employer – not the employee.
The Benefits of HSAs, FSAs, and HRAs
With each type of account, there are positives and negatives. As things can get complex, read below for a brief overview of the benefits of each account type:
- Little Administration: HSA programs tend to minimize compliance issues and administration costs for employers.
- Employee Owned: The employee owns his or her HSA. So they benefit from reducing medical cost, as well. Unlike an FSA, where an employee may rush to spend the money in the account at the end of the year to avoid losing it.
- Flexible: Employers looking for a flexible health care solution typically like HSAs. The accounts are portable and offer room for growth, along with distribution of funds for non-medical reasons.
- Ideal with Traditional Plans: Employers offering traditional health insurance plans to their employees typically prefer FSAs because they pair well.
- Employer Keeps Funds: Many employers like FSAs because they get to keep all unspent funds at the end of the year.
- High Flexibility: With a traditional health plan and deductible, an employee can estimate expenses with ease then defer income into an FSA. The system is flexible to each employee's needs.
- More Flexibility: HRAs offer more flexibility than the other plans. Larger, sophisticated employers who offer complex benefit packages tend to like offering HRAs.
- Ideal for Self-Insured: HRAs are great for employers who self-insure, as well. The plans can reduce health care costs for all while increasing employee satisfaction.
- Mixed Plans: HRAs can be offered in conjunction with FSAs, and on occasion – HSAs. This increases the flexibility of the accounts.
Understanding HSAs, FSAs, and HRAs
The wide world of health insurance and the variety of accounts may be confusing. Working with an expert to understand HSAs, FSAs, and HRAs is important. Before signing up, make sure one understands the benefits of each account and how they can benefit an individual.
For more information regarding HSAs, FSAs and HRAs contact Skyline Risk Management, Inc. at (718) 267-6600.