HOUSTON BUSINESS REVIEW

HSA/FSA/HRA Comparison Chart –Additional Detail
By Mike Alexander Sr.

Mike is involved with several organizations including the National Association of Health Underwriters, Independent Insurance Agents Association, East End Chamber of Commerce, Better Business Bureau and the National Association of Small Business Owners, to name a few. Mike is a licensed Risk Manager and highly regarded in the insurance industry.

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HSA/FSA/HRA Comparison Chart, Part II

What are they and how do they compare? Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Care Reimbursement (HRAs) are optional accounts some employers choose to offer in conjunction with health insurance coverage. The common thread between these accounts is that they all provide tax advantages and a means for employees to control a portion of their health care dollars.Some of the differences are discussed below.

What is an HSA? An HSA requires that the insured be covered under a High Deductible Health Plan ("HDHP") unlike an FSA or HRA. Also unlike an FSA or HRA, an HSA is an individual custodial account that is owned by the individual rather than the employer. That legal ownership issignificant because it allows employees to use that money as they see fit: spending it on eligible health care expenses, saving it for the future, or even spending it on consumer goods (penalties apply). The fact that the account belongs to the employee also removes many of the compliance and administration requirements from the employer. For example, with HSAs the employer is not required to review receipts.
What is an FSA? An FSA is an account established as part of a Section 125 Cafeteria plan that allows employees to defer a portion of their income to pay for medical expenses on a tax-free basis. FSAs are a popular employee benefit in large part because of the tax benefits and they work with a traditional health plan. The employer owns the account and is responsible for its management, including paying claims as they occur (often this is accomplished by hiring an outside administrator).Money left over at the end of the year (or period) reverts back to the employer and not the employee.
What is an HRA? An HRA is an employer provided account that allows employees todirect a portion of their health care spending. The employer contributes funds to the employees HRA account and the employee can spend the funds on eligible health care expenses. HRAs work verysimilar to an FSA and HSA with one key difference being they do not allow for payroll deferral. An advantage of HRAs is their flexibility as they allow for a variety of different designs. For instance, an HRA may allow employee funds to rollover year after year and grow for future use; however, the HRA belongs to the employer. Any remaining funds belong to the employer when the employee separates from service. With an HRA the employer is also responsible for compliance and administration (often accomplished by hiring an outside administrator).

Which plan is best?Although there is no simple answer to this question, some points to consider are:

HSA. An HSA generally works well for employers that want to minimize administration and compliance issues. Also, employers seeking to minimize their costs and involvement often offer HSAs because the employer does not have to fund any portion of the account. Employers desiringto offer the most flexible solution for employees are often drawn to the HSA as it is the only one that allows forportability, the opportunity for significant investment growth, and the distribution of funds for non-medical reasons (including for any purpose at age 65 without penalty). Employees may prefer HSAs to FSAs because the funds belong to them so they do not need to worry about being as precise in estimating their medical expenses. This is especially important given that employees with HSAs are covered under High Deductible Health Plans where it is more difficult to accurately estimate expenses.
FSA. Employers offering traditional health care plans often prefer FSAs. A traditional health plan limits out-of-pocket expenses so that the rollover feature of HSAs is less important and it's also easier for an employee to estimate expenses. FSAs allow employees to defer extra income into the FSA to pay for co-pays, medical bills not covered by insurance, as well as dental and vision care. FSAs also allow for potentially greater contribution amounts than HSAs, although that is generally not a key issue for employers or employees. One significant employer benefit of FSAs over HSAs from the employer's perspective is that the employer gets to keep unspent money at the end of the year.
HRA. HRAs are generally offered by employers that self-insure all or a portion of their health care. The HRA provides a method for self-insuring employers to put in consumer-directed efforts to reduce overall health care costs and increase employee satisfaction at the same time. HRAs are more complicated to administer than HSAs. A key limitation of HRAs is that only the employer can fund the HRA.

Are HSAs, FSAs, and HRAs taxed the same? Basically all three types of plans enjoy tax-free treatment for health care expenses. How each of them arrive at this is a bit more complex. HSAs are deductible by the employer when made by the employer as a "comparable" contribution or when made by the employees through a section 125 plan. In both cases the contribution will not show as income on the employee's income tax return. Individuals may also contribute directly to an HSA and deduct the amount on their income tax return. FSA and HRA expenses are deductible by the employer and not reported as income to the employee.