Due to rising health insurance costs, the majority of U.S. businesses are increasing the employees' share of health care. This "cost-shifting" from employers to employees comes in many different forms, including:
- Increased employee share of premiums,
- Increased deductibles,
- Increased coinsurance, and
- Increased or elimnated co-pays.
Many businesses are looking for ways to lower the expense of medical benefits without reducing coverage for employees. Pre-tax health care accounts can help businesses and employees save money by paying for health care expenses with pre-tax dollars.
What are the Different Types of Pre-tax Healthcare Accounts?
The most common forms of Pre-tax Healthcare Accounts include:
Health Reimbursement Arrangements - A Health Reimbursement Arrangement, or HRA, 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. A health reimbursement arrangement is not health insurance. A health reimbursement arrangement allows the employer to make contributions to an employee's account and provide reimbursement for eligible expenses. A health reimbursement arrangement is an excellent way to supplement health insurance benefits and allow employees to pay for a wide range of medical expenses not covered by insurance. It is often referred to (incorrectly) as a health reimbursement account.
Premium Only Plans - A Section 125 Premium-Only-Plan, or POP, is a cafeteria plan which allows employees to pay their health insurance premiums with tax-free dollars. Traditionally, these POP plans have been used in combination with employer-sponsored group health insurance plans. However, beginning January 1st, 2009, employees can now use POP plans to pay individual health insurance premiums with tax-free dollars.
Health Flexible Spending Accounts - With a Health Flexible Spending Account, or FSA, employees direct their employer to lower their pre-tax wages next year by $200/month, and the employee, on the first day of the next plan year, receives a $2,400 FSA allowance for medical expenses. The employee must be given access to the full $2,400 on the first day of the plan year. If an employee spends the full $2,400 in the first month and quits, the employer is not allowed to recover the unpaid balance.
Health Savings Accounts - Health Savings Accounts, or HSAs, are individual bank accounts owned by employees that allow tax-free medical expense reimbursement. While HSAs are often packages as "employer benefits", they are really more like IRAs in that individuals can set them up and contribute to them on their own.
What are the Benefits of Pre-tax Healthcare Accounts?
The employer and employee benefits of pre-tax healthcare account include:
Reduced payroll costs - Pre-tax Healthcare Accounts saves employers and employees thousands of dollars in payroll taxes
Increases employee's benefits and take home pay - Pre-tax Healthcare Accounts increase employee compensation because the does not have to pay income taxes on reimbursements.