HSA or HRA?
May 7, 2009 by Bill MeltzerPosted in: In this week's e-newsletter, Latest News & Views
At first glance, it would seem logical to assume that employees would prefer health reimbursement arrangements (HRAs) to health savings accounts (HSAs).
After all, employers fund HRAs. Employees pay for HSAs themselves.
But workers with the option of choosing between the two plans typically choose the HSA, a study of 130 organizations finds.
Unlike an HRA, employees can take an HSA with them if they
leave the organization. Also employers set the rules for which medical services employees can and can’t be reimbursed under an HRA. With an HSA, the use is up to the employee.
May 14th, 2009 at 3:20 pm
Would someone care to share the difference between the above and an FSA? We just instituted an FSA here with great success and I am curious as to the differences between it and the above mentioned HSA/HRA.
May 15th, 2009 at 9:56 am
In simplistic terms, an FSA is a complimentary offering wherein an employee can set aside their own money for expected out of pocket expenses. It is a “use it or lose it” product, so any money the employee elects to set aside in an FSA must be used for expenses incurred by the end of the plan year or they lose access to it and it is non-refundable. An HRA is an employer funded reimbursement account that kicks in when an employee incurs a covered expense and submits a claim for an HRA reimbursement. An HSA is a complimentary offering to a high deductible plan, and allows an employer and/or employee to fund a Health Savings Account that is tax sheltered, earns interest, is owned by the employee and can be carried over year to year. This money can be used to reimburse the employee for covered expenses and has the most favorable tax treatment to the employee compared to the FSA or HRA. A Limited FSA can be offered as a compliment to the HSA.
May 15th, 2009 at 12:00 pm
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 the account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), funds roll over and accumulate year over year if not spent. HSAs are owned by the individual, which differentiates them from the company-owned Health Reimbursement Arrangement (HRA) that is an alternate tax-deductible source of funds paired with HDHPs. Funds may be used to pay for qualified medical expenses at any time without federal tax liability. Withdrawals for non-medical expenses are treated very similarly to those in an IRA in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier. These accounts are a component of consumer driven health care.
May 21st, 2009 at 8:36 am
The main difference is that the money not used by year end (or your cut off date) in a FSA is lost. The money put into a HSA does not have a deadline to use it by – meaning, the money carries over from year to year and is always available to the employee.
May 21st, 2009 at 12:02 pm
One thought to be wary of on the HSA side of this question; if the employer funds any portion of an HSA, those funds are ‘owned’ by the employee. While the guidelines for utilization of HSA funds is limited to legitimate medical expenses, there is not usually any TPA or the like to monitor if the usage is for exactly that. As an employer who has since ceased employer contributions to an employee’s HSA, after it was discovered that an employee was able to use his/her debit card (tied to the HSA) and purchased a big screen TV at Costco. This was a nice way for an employer to offer an additional ‘benefit’ to an employee, yet not the general idea of why the HSA was originally implemented. We have since allowed employees to contribute their own funds to these accounts and while the penalties are the same for improper usage; those funds are not coming from the employer side and there for employees to use for true medical expenses. Our question posed to the employee that used his/her funds inappropriately was; “If you had a catrostrophic medically related event occur in yours or one of your family members lives, and those HSA funds are no longer there; how will you bear the financial responsibility of ensuring their medical care?” Suddenly you see a light bulb go off in their head and his/her response is….”Man, I hope I can return the TV, my spouse will go crazy if he/she finds out that we couldn’t care for a family member”. Needless to say, we never found out whether or not Costco allowed him/her to return the TV – as the employee was subsequently terminated for other good cause reasons. Just another lesson learned by the employer and the departing employee.
May 21st, 2009 at 12:21 pm
All the above is correct, but don’t forget though that the FSA can also include dependent care, which the HSA cannot. On the other hand, eligible expenditures in HSAs are a lot more diverse than FSAs.
I guess the big question is what health care coverage the employer provides. To be able to consider a HSA, the health insurance must have a high deductible. FSAs don’t have that requirement.
May 21st, 2009 at 1:47 pm
My husband and I elected an HSA this year and wished we had elected it in previous years. We are in our early fifties and are planning to retire prior to Medicare kicking in (at what age – who knows by then). This will help us to pay for medical expenses and an individual health insurance policy by the time we retire. His employer contributes a set amount into this account which is another bonus.
I encourage people who are healthy and financially able to consider an HSA if available.
May 21st, 2009 at 2:00 pm
An added advantage – unlike an IRA, money in an HSA is never taxable so long as it is used for an eligible medical expense, which makes it a great addition to a retirement portfolio.
May 21st, 2009 at 2:01 pm
HSA’s are a better option for the very high wage earner, professional offices such as doctors, lawyers, financial advisors, etc. (those who make enough money to need a tax advantage) but do not work so well for the young family or anyone with ongoing prescription needs. Unlike an FSA, an employee polices itself on it’s reimbursements – opening the door for serious tax issues if the purchase does not meet IRS standards for HSA reimbursement.
Please tell me why the government always seems to find the need to complicate things? An FSA is a good vehicle (benefit), however it could be an excellent benefit if they would drop the use it or loose it rule, allow the employee to carry forward and continue to contribute, building up a medical nest egg, while at the same time having current use of the money without penalty. This give us a tax benefit, now and later, allows us to meet our current medical needs and at the same time save for those medical expenses we will all face once we begin to age and get into the medicare system.
May 21st, 2009 at 5:38 pm
I agree with djc. I recently lost some $ because I did not realize that I could only expense medical bills after the enrollment date (change in status allowed me to enroll since my husband was changing jobs). Despite moving from one FSA to another FSA account, I could not get reimbursed.
I understand some people may tried to get reimbursed from both accounts…not me…then what happens to the unlucky individual that has a large medical expense that occurs then can’t get reimbursed because of the enrollment date….and happen to have money left in the account. That just does not make sense to me.
I like the couple of years they gave you 3 extra months to use the $ up.
May 28th, 2009 at 2:30 pm
The HSA needs to be coupled with a QHDHP, which enables the employee/insured to grapple with the actual cost of medical care. The FSA can be used with a $0 deductible medical plan, which would allow the EE to tax shelter money without really having a medical need to use the funds. Thus there would be lost tax revenue without any corresponding liability for medical expense in the short term.
May 29th, 2009 at 1:15 pm
Actually, I have to disagree with djc… My family had a child this year, as well as medical for our daughter, and the QHDHP with HSA basically turned my healthcare into a fixed cost, with hospital bills being paid out of my HSA account. Like anything else, the critical point for people going into a QHDHP with HSA is the first couple of months to build up the account. A lot of our employees front load the HSA and then drop the contribution down based on usage, giving them a little more in their check down the line, and in future years, they can drop the contribution all together if they so choose.