Account-based health plans vs. healthcare reimbursement plans

Employers and HR managers often strive to offer their employees the best possible healthcare benefits. But with rising healthcare costs nationwide, it’s vital to ensure that the benefits you offer are also affordable.

Two popular benefits that have gained traction over the years are account-based health plans (ABHPs) and health reimbursement plans. While these two benefits have their differences, they can both save you money, better attract and retain employees, and improve overall morale. But it can be challenging to know which option is truly the best choice for your specific organization.

This article will compare account-based health plans and health reimbursement plans so you can make an informed decision for you and your employees.

In this blog post, you’ll learn:

• The key differences between account-based health plans and health reimbursement plans.
• The pros and cons of each option, including how they impact costs, taxes, and employee flexibility.
• How to choose the right health benefit for your organization based on your budget, workforce needs, and long-term goals.

What is an account-based health plan?

An account-based health plan (ABHP) combines traditional health insurance with a tax-advantaged medical spending account. These accounts allow employees to set aside pre-tax dollars to pay for eligible healthcare expenses.

ABHPs are designed to lower taxable income while helping employees prepare for out-of-pocket costs, such as deductibles, prescription drugs, and other qualified medical expenses under IRS guidelines.

Here are the two most common ABHPs:

1. Health savings account (HSA). HSAs are tax-advantaged accounts that allow employees to save pre-tax money, which they can then use on current and future medical care. Either an individual can open an HSA or an employer can offer one as part of their benefits package, but the individual (or employee) always owns it. However, the account holder must have an HSA-qualified high deductible health plan (HDHP). Both employees and employers can contribute to the HSA up to an annual limit. Funds roll over year to year and stay with the employee, even if they change jobs.
1. The federal government expanded HSA eligibility as of January 1, 2026.¹ Bronze and catastrophic health plans on the individual and small group ACA markets now qualify as HSA-compatible.
2. Flexible spending account (FSA). A health FSA is an employer-owned account that allows employees to use pre-tax money to pay for qualifying healthcare services and items. Like HSAs, employers and employees can contribute to their FSA up to the IRS-set annual limit². However, FSAs are dependent on employment, meaning that employees can’t keep their FSA funds if they leave their job.

Pros of an account-based health plan

ABHPs remain a popular option for organizations looking to supplement their health insurance benefits or provide value while reducing premiums through an HDHP.

Here are some other pros to ABHPs:

• Eligible expenses include a wide range of medical, dental, and mental health services.
• Employee and employer contributions are typically made with pre-tax dollars through payroll deductions.
• Many ABHPs issue a debit card to participants, which allows them to pay for expenses directly and keep withdrawals simple.
• HSAs are triple tax-advantaged. This means that contributions, growth, and withdrawals for qualified healthcare expenses are tax-free. Employees often use them as a long-term retirement savings strategy.
• Pairing an HSA or FSA with high-deductible plans often reduces monthly out-of-pocket costs while keeping premiums low.

Cons of an account-based health plan

The advantages of ABHPs benefit both employers and employees alike. However, these types of plans also come with downsides.

Here are some cons to HSAs and FSAs:

• HSAs only work with qualified HDHPs. This means your employees must meet their plan’s high deductible before their health insurance plan will begin paying for their healthcare costs.
• Both HSAs and FSAs are pre-funded accounts, so you’ll have to put up the money ahead of time. With HSAs, your contributions will stay in your employee’s account until they spend it, even if they don’t use the money or leave your organization. While this is a benefit for employees, it can become expensive for employers.
• FSAs have a “use it or lose it” provision, meaning that unused funds will expire at the end of the plan year. While this benefits employers, employees may not like the limited duration.
• The IRS caps annual HSA and FSA contributions.
• You can't set up both an HSA and an FSA unless it’s a limited-purpose FSA.
• Employees with chronic conditions may face higher out-of-pocket costs.

When does an account-based health plan work best?

ABHPs can help your employees more easily manage their out-of-pocket medical expenses throughout the year. But choosing one will greatly depend on the type of workforce you have.

ABHPs tend to work best for organizations with relatively healthy workforces that use less healthcare and are comfortable taking on more upfront cost in exchange for lower monthly premiums. For example, younger teams or employees with minimal ongoing medical needs often benefit from pairing an HSA with an HDHP, especially now that bronze and catastrophic small group plans are HSA-compatible.

These plans can also be a good fit for employers looking to reduce premium spend while still offering a tax-advantaged benefit. However, for employees who expect frequent care or have chronic conditions, a health plan with a higher deductible can lead to significant out-of-pocket expenses, which may outweigh the tax savings and lower premiums.

What is a health reimbursement plan?

A health reimbursement plan is a type of benefit where you reimburse your employees for eligible medical expenses.

A health reimbursement plan isn’t health insurance, but it can be a viable alternative. Instead of pre-funding an account, employers reimburse employees for qualified healthcare costs after they incur them and submit claim documentation. Some types of health reimbursement plans only work with traditional group plans, but many allow employees to choose and enroll in their own individual health insurance coverage.

While some employers used to offer informal health reimbursement plans, there’s a newer, tax-advantaged way to reimburse employees for medical costs.

Health reimbursement arrangements (HRAs) are a benefit funded and owned by the employer that reimburses employees tax-free for qualified medical expenses. Instead of pre-funding an account, you set a monthly allowance, and employees submit claim documentation of eligible purchases. If approved, you reimburse them tax-free up to their available allowance amount.

Here are popular types of HRAs:

1. Qualified small employer HRAs (QSEHRAs). A QSEHRA is specifically for businesses with fewer than 50 full-time equivalent employees (FTEs). While the IRS sets annual contribution limits, there’s no minimum requirement, giving employers flexibility in how much they offer. Employers can choose to reimburse employees for individual health insurance premiums only or include other medical expenses. To participate, employees must be enrolled in a plan that meets minimum essential coverage (MEC).
2. Individual coverage HRAs (ICHRAs). The ICHRA offers greater flexibility. It’s available to employers of any size, and it doesn’t have minimum or maximum contribution limits. To better control your budget, you can structure the benefit to reimburse individual health insurance premiums alone or premiums with other qualified expenses. ICHRAs allow you to vary eligibility and allowance amounts using employee classes. You can also vary allowances by age and family status. Employees must have qualifying individual health coverage to use the benefit.
3. Integrated HRAs. Also known as a group coverage HRA (GCHRA), this HRA can only supplement a traditional group health plan. Employees can’t receive reimbursement for premiums, but the GCHRA can cover out-of-pocket costs, such as deductibles, copays, and coinsurance. Only employees enrolled in their employer’s group health plan can participate.
4. Excepted benefit HRAs. An excepted benefit HRA (EBHRA) supplements a traditional group health plan by reimbursing employees for certain excepted benefits, such as vision and dental coverage, accident or cancer insurance, limited health benefits (such as short-term insurance), and cost-sharing amounts for supplemental health benefits. Employers of all sizes who offer a group plan can offer an ICHRA, but employees don’t need to enroll in your group plan to participate in the benefit. Like the QSEHRA, the EBHRA has a maximum contribution limit set by the IRS each year.

Pros of health reimbursement plans

Like with ABHPs, the advantages of health reimbursement plans are numerous. Let’s go through some of their highlights and benefits below.

Here are some pros to health reimbursement plans:

• HRA employer contributions are tax-deductible and free from payroll taxes. Employee reimbursements are also free of federal income taxes.
• Employees can have both an HRA and an HSA if the HRA is HSA-compatible, such as a limited-purpose HRA (which covers dental and vision expenses only) or a post-deductible HRA (which reimburses expenses after the employee meets their deductible).
• By allowing your employees to choose their own coverage, they have greater choice over their personal medical decisions and can better control their health outcomes.
• HRAs can make your company’s benefits package more attractive, helping you stand out from your competitors.
• Reimbursement plans are lower-risk benefits because you only reimburse employees after they incur an eligible expense and you approve it.
• HRAs are flexible and customizable, so you can design a benefit that best suits the needs of your workforce and your budget.
• Applicable large employers (ALEs) can use an ICHRA to satisfy the Affordable Care Act's employer mandate.

Cons of health reimbursement plans

Considering all the pros above, it’s easy to see why health reimbursement plans are increasing in popularity. But they’re not without their drawbacks as well.

Here are some cons to health reimbursement plans:

• Health reimbursement plans are employer-funded. This means if an employee leaves your company, any unused HRA money stays with you. While this is a benefit to employers, employees lose any leftover funds.
• Employees can’t contribute to an HSA if the HRA reimburses general medical expenses before the deductible.
• Only W-2 employees are eligible for an HRA. If you employ many seasonal or temporary workers or 1099 employees, they won’t be able to participate in the benefit.
• Reimbursement plans tend to come with a learning curve for employees if they’re only used to traditional group health insurance and aren’t familiar with the reimbursement model.
• Employees can’t contribute to an HRA, so they can’t boost their allowance amount if they feel like you didn’t offer them enough.

When do health reimbursement plans work best?

Health reimbursement plans are a strong fit for employers who want predictable costs and greater flexibility in how they offer benefits. However, to determine whether a health reimbursement plan is a good fit for your business, you’ll first need to make sure you meet the eligibility guidelines. For example, to offer a QSEHRA, you must have fewer than 50 full-time equivalent employees.

Next, you should review your budget. If you’re already paying for a traditional group health plan, an integrated HRA can help supplement it. However, if group health insurance isn’t in your budget, an ICHRA is a strong choice. An ICHRA also offers budget control because it has no contribution limit, so you can offer as much as your budget allows. However, ALEs will need to keep affordability in mind when designing their ICHRA allowance.

Finally, consider whether the plan would work for your employees. For example, a QSEHRA is an excellent solution if you're a small business with employees with a diverse range of insurance situations. However, if you want to set different allowance amounts for different employees, an ICHRA would be a better fit.

Reimbursement plans are also ideal for employers who are priced out of group plans or want to transition to a defined contribution strategy. While they may require some employee education upfront, many organizations find that the long-term cost control and flexibility outweigh the initial learning curve.

Account-based health plans vs. health reimbursement plans comparison chart

The chart below compares the main differences between ABHPs and health reimbursement plans.

How you can offer a personalized HRA with PeopleKeep

If you’re ready to move toward a more flexible, cost-controlled benefits strategy, PeopleKeep by Remodel Health can help you build and manage a reimbursement model with ease.

Our HRA administration software takes the complexity out of offering personalized health benefits. Our platform automates time-consuming tasks, such as creating plan documents, verifying claim documentation, processing reimbursements, and maintaining compliance with federal regulations. This means you can offer a flexible health benefit without adding administrative burden to your HR team.

With PeopleKeep, you can:

• Design a QSEHRA, ICHRA, or GCHRA that fits your budget with customizable monthly allowances.
• Give employees the freedom to choose the individual coverage, providers, and medical services that work best for them.
• If you offer a QSEHRA or an ICHRA, your employees can shop for qualifying coverage right from their PeopleKeep accounts. Our in-house benefits specialists are standing by to help those with complex medical situations if they have questions.
• Automatically generate your legal plan documents and send required employee notices.
• Spend just minutes each month administering your benefits.

For ALEs looking for more advanced ICHRA support, our parent company, Remodel Health, offers a full-service ICHRA+® administration solution that combines hands-on guidance, employee onboarding support, and benefits navigation to help you successfully transition to a larger-scale ICHRA benefit.

Whether you’re a small business looking to implement your first benefit offering or a growing company looking to switch from traditional group coverage, we have the tools and expertise you need to support your employees and their families.

Conclusion

Whether you’re a start-up or a seasoned company that’s been operating for years, it’s important to offer employee health benefits. Both ABHPs and reimbursement models can be valuable benefits that help you attract and retain the right employees. But depending on your specific needs and goals, one may be better than the other. So, it’s crucial to compare the two carefully.

If you think a health reimbursement plan, like an HRA, is the right choice for your organization, PeopleKeep by Remodel Health is here to help! Contact our HRA specialists, and we’ll match you with the perfect benefit solution for your budget and team.

This blog article was originally published on June 29, 2022. It was last updated on May 15, 2026.

References

1. H.R.1 – One Big Beautiful Bill Act

2. IRS Publication 15-B