There are four basic types of accounts and arrangements that companies use to provide tax-advantaged medical expense and insurance premium reimbursement to employees.
Company Funded Arrangements
Health Reimbursement Arrangements (HRAs)
Health Reimbursement Arrangements are tax-advantaged arrangements (not accounts) that employees can use to receive reimbursement for qualified medical expenses, including health insurance premiums. An HRA can supplement a group policy or provide employer funds for an individual health policy. All employees, former employees, and retirees qualify to have an HRA. HRAs must be 100% funded by employers.
Employee Funded or Owned Accounts
Flexible Spending Accounts (FSAs)
Flexible Spending Accounts are tax-advantaged arrangements where employees convert pre-tax wages into a fixed annual fund to pay for out-of-pocket medical expenses. FSA funds cannot pay for health insurance premiums. All employees qualify to have an FSA. FSAs are generally 100% funded by employees, although employers are allowed to offer incentive Flex Credits as FSA contributions.
Premium Only Plans (POPs)
Premium only Plans are effectively an FSA for individual or family health insurance premiums, as allowed under new IRS regulations effective 1/1/09. Employers can either reimburse employees for individual health insurance policy premiums or pay such premiums directly to insurance carriers. All employees qualify to have a PSA.
Health Savings Accounts (HSAs)
Health Savings Accounts are tax-advantaged consumer savings accounts similar to an IRA or 401k that consumers can use to pay for qualified medical expenses. HSAs are supplements to health insurance since HSA funds cannot generally pay for health insurance premiums. Only employees who obtain HSA-qualified high deductible health insurance from an employer’s group plan or from a individual health policy qualify to have an HSA. HSAs can be funded by employers, employees, or third parties.