Understanding HSAs, HRAs, and FSAs for Employers

Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs), and Flexible Spending Accounts (FSAs) allow employers to save costs on healthcare expenses. They also benefit employees by providing options to use pre-tax dollars towards qualifying healthcare expenses. An HSA, HRA, and FSA all work differently. Here, we discuss the differences between each so you can decide which is best for your business.

Understanding HSAs, HRAs, and FSAs for Employers

HSAs, FSAs, and HRAs are health savings accounts that allow employees to manage medical and healthcare costs. All three allow employees to use pre-tax dollars for covered healthcare expenses.

In understanding HSAs, HRAs, and FSAs for employers, it’s necessary to appreciate how each health savings account works, what is covered by each, and which medical plans they best accompany.

Health Savings Accounts (HSAs)

What Types of Medical Plans do HSAs Accompany?

A Health Savings Account (HSA) is a savings plan that accompanies a high deductible health plan (HDHP). HDHPs are medical plans with a high deductible participants need to meet before the co-pay, or co-sharing aspect of the plan kicks in for covered medical expenses. To be considered an HDHP, the deductible has to be at least $2,800 for a family or $1,400 for an individual in 2022. Some base plans can have a deductible as high as $3000 or more for an individual and $5000 or more for a family. Similar to traditional co-pay medical insurance plans, HDHPs cover standard medical services, like lab tests, office visits, and prescription drugs. However, services are typically covered to a greater degree for in-network vs. out-of-network doctors.

Due to the high deductible of HDHPs, they are typically accompanied by an HSA or an HRA to help employees offset the up-front costs associated with a high deductible.

What Amount Can Be Contributed to an HSA?

An HSA allows employees to deposit money annually into the account on a pre-tax basis to cover qualified health-related expenses. HSAs can cover medical expenses such as deductibles, co-pays, vitamins, vision exams, dental exams, prescriptions, and more. The IRS sets the annual contribution limit allowable for HSAs, which for 2022 is $3,650 for an individual and $7,300 for a family.

Employees need to keep receipts for all expenses paid for using their HSA. This is in case they are asked for the receipts for verification purposes by the IRS.

Employers can contribute funds up to the IRS limit to their employees’ HSAs. Once funds are invested into the HSA by the employer or employee, they remain with the employee, even if their employment terminates—if an employee leaves the company, the HSA account goes with them. An HSA does not have a “use it or lose it” clause and does not require employees to use the funds within a certain period of time. The money placed into an HSA can stay in the account for as long as the participant wants it, or they can roll over and convert the funds to a 401k plan after certain criteria have been met.

Who Do HSAs Work Best For?

HSAs are ideal for employees that have a lower level of medical expenses or whose medical expenses are predictable. It is also ideal for workers who would like to keep pre-tax money in a savings account with the option of converting it to a 401k down the road.

Individuals on Medicare cannot contribute to an HSA, though any funds put into an HSA previous to being on Medicare can be applied towards any Medicare premiums.

Who Owns the HSA Account?

The individual owns their HSA account. This is the primary difference between an HRA and an HSA. HRAs are owned by the employer.

Health Reimbursement Account (HRA)

What Types of Medical Plans do HRAs Accompany?

A health reimbursement account (HRA) is a health benefit for reimbursement of an employee’s permissible out-of-pocket medical costs. It is a tax-advantaged account that operates much like an HSA. However, where an HSA can be both employee and employer-funded, an HRA is only funded by the employer. Employees cannot make contributions to an HRA.

HRAs often accompany an HDHP. They are also commonly offered by employers who cannot afford to offer traditional employer-sponsored medical plans. They are one of the most flexible benefit plan options available.

What Types of HRAs Are Available?

There are various types of HRAs available for employers to offer and fund. They include:

•            Dental HRA

•            Excepted Benefit HRA

•            Group Coverage HRA

•            Individual Coverage HRA (ICHRA)

•            Qualified Small Employer HRS (QSEHRA)

•            Retiree Health Reimbursement Arrangement (RHRA)

•            Vision HRA

Differences between the available options include varying tax advantages, employee count limitations, different allowable covered expenses, and varying medical plan integration requirements.

What Amount Can Be Contributed to an HRA?

Allowable reimbursement amounts vary based on the type of HRA administered, and employers can choose what they offer to employees through their HRA within the permissible limit for that plan year. For the QSEHRA, contributions cannot exceed the IRS-specified dollar amount limits, which are $5,450 for individual coverage and $11,050 for family coverage in 2022.

Once the employer sets the allowable amount, the employee utilizes the account to cover qualifying healthcare purchases. The employee must submit proof of the purchase for approval and reimbursement by the employer.

HRAs do not have a “use it or lose it” clause, so the employer can allow employees to roll over a certain amount of unused funds into the next plan year. However, unlike an HSA, the funds do not go with the employee if their employment terminates.

Who Do HRAs Work Best For?

HRAs are the most flexible of all the available health savings accounts, and All employees can benefit from them. Medicare premiums are reimbursable with HRA funds, and HRA funds can be utilized to cover healthcare expenses for dependents and spouses.

Who Owns the HRA Account?

The employer owns the HRA account, unlike with an HSA, which the employee owns.

Flexible Spending Accounts (FSAs)

What Types of Medical Plans do FSAs Accompany?

FSAs have been around longer than any other health savings account. Typically, FSAs accompany traditional co-pay medical plans.

Similar to an HSA, an FSA permits employees to contribute pre-tax dollars to cover qualifying medical expenses up to the annual maximum allowed. FSAs can be used to cover expenses like chiropractor visits, co-pays, dental exams, and other expenses and services.

What Amount Can Be Contributed to an FSA?

Employees and employers can both contribute to an FSA up to the allowable IRS limit, which is $2,750 for 2022. Once employees make the election for the amount they want to contribute to their FSA, the amount is divided by the total number of pay periods in the plan year, and that amount is deducted from each paycheck.

Employees are permitted to borrow against the total amount they allotted to contribute to their FSA, meaning that the full allotment is available for use at the beginning of the plan year, which is different than how an HSA is designed.

The FSA does have a “use it or lose it” clause, so if an employee doesn’t use all the money deposited into the FSA for that year, they lose the money. On the flip side, if an employee leaves an organization and they’ve spent more than what was deposited, they don’t need to repay the money. Also, the IRS does allow employers to offer one or two carryover options for FSAs, left up to the employer’s discretion, including:

•            Carryover: With the carryover option, up to $550 of unused funds can be carried over into the next plan year. For example, an employee that has $1550 remaining at the end of the plan year can carry over $550 and will forfeit $1,000.

•            Grace period: The grace period option allows employees two-and-a-half months following the end of the plan year to use their FSA balance. Funds remaining after the grace period are forfeited.

Employers can choose to offer the grace period or the carryover options but cannot offer both. Or they can choose to go with the end-of-plan-year forfeiture option, where the employee would forfeit any unused funds at the end of the plan year.

Who Do FSAs Work Best For?

FSAs work well for those that want to use pre-tax dollars toward medical expenses and have a traditional co-pay medical plan. FSAs also work well for those that will have medical expenses early in the year since they can utilize the full allotment prior to the funds being deposited into the account.

Who Owns the FSA Account?

The employer owns the FSA account. Once an employee terminates employment, they are typically no longer eligible to utilize FSA funds.

Which Health Savings Plan Should You Choose?

As outlined, each health savings plan option provided different benefits to the employee and employer. Which you choose comes down to things like budget, your demographic population, and what is best overall for the health of your organization.

If you’re on the fence about which is best for your organization, a benefits broker like KBI can help. It’s our job to understand the ins and outs of employment benefits, so you don’t have to do the heavy lifting.

Give us a call today to discuss your medical and healthcare options.