How a group coverage HRA and HSA compare
The primary options for companies looking to supplement their group health insurance plan are Section 105 plans, commonly known as group coverage HRAs (GCHRAs), and Section 125 plans, also known as cafeteria plans, which include health savings accounts (HSAs).
This article describes how group coverage HRAs compare to HSAs to help organizations understand which option will best help them meet their goals.
How an HSA works
With an HSA, the employer pre-funds a savings account. The process is as follows:
- An employer offers employees an HSA-qualified High Deductible Health Plan (HDHP). The IRS releases annual guidelines for the minimum deductible and maximum out of pocket maximums that these plans must follow.
- An employee (or an employer, on behalf of the employee) sets up an account.
- Both employees and employers can contribute pre-tax dollars, up to the IRS-defined annual maximum. When the employee withdraws money, they are not taxed, so long as they use it to pay for medical expenses specified in IRS Publication 502. Employees can withdraw money for non-medical purposes but will face a 20% tax penalty and be required to report the withdrawal as income. People over the age of 65 do not suffer the 20% tax penalty for non-medical withdrawals but must report the withdrawal as income and pay income taxes on those funds.
- Money deposited into this account belongs to the employee, and they take it with them when they leave the company. Unlike a retirement account where employer contributions may have a vesting schedule, 100% of employer contributions to an employee’s HSA immediately belong to the employee.
- While employees can withdraw money at any time, they can only contribute money to the account while they are covered under a qualified HDHP.
How a GCHRA works
With a GCHRA, rather than pre-fund a savings account, the employer agrees to reimburse employees for medical expenses. The process is as follows:
- The employer offers employees any traditional group health plan.
- The employer sets up plan documents describing the terms of the plan, including the amount they will reimburse employees for and what expenses they will cover.
- The employee submits expenses as they’re incurred.
- The employer reviews the expenses to make sure all required documentation is included and the expense is valid under the terms on the plan document.
- The employer reimburses the employee up to a maximum amount decided by the employer.
- A GCHRA can be offered with any traditional group health insurance plan. Employers can use them like an HSA to help employees cover expenses under a high-deductible plan or to cover any minor expenses under an already generous group health insurance benefit.
- With a GCHRA, there is no limit to the amount the employer can reimburse employees, while HSAs have annual contribution limits.
- The annual reimbursement amount (allowance) can be accrued monthly or made entirely available upfront.
- Employers can specify expenses they want to reimburse. For example, an employer might reimburse medical and dental, but not vision, or only reimburse for expenses covered under their insurance plan by requiring an Explanation of Benefits. With an HSA, all expenses listed in IRS Publication 502 are eligible.
- Employers can implement cost-control mechanisms like deductibles—requiring employees to pay all expenses themselves, up to a predetermined threshold—or cost sharing—requiring employees to pay a certain percentage of all expenses.
- The employer only pays for expenses as their employees incur them. If an employee doesn’t use their entire allowance by the end of the year, those funds remain with the employer.
- When an employee leaves the company, any unused allowance funds stay with the employer. (Note that employees who leave have 90 days to submit expenses incurred while they were still employed.)
Key differences between a GCHRA and an HSA
A GCHRA is much more flexible than an HSA. Key differences are summarized, as follows:
Which one is right for you?
Following are some guidelines to follow when deciding whether to use a GCHRA or an HSA.
Use a GCHRA when:
- You want to offer a higher deductible plan to save costs, but want to give employees the same or better coverage as a lower deductible plan. See the following article.
- You don’t want to offer a high deductible plan, but still want to help employees cover out-of-pocket expenses.
- You want the flexibility to choose the expenses you can reimburse employees for.
- You want to control your costs by having employees pay for some of their expenses using a deductible and/or cost sharing
- You want to leverage the benefit for retention by making it contingent on the employee’s continued employment.
Use an HSA when:
- You want to offer an HSA-qualified high deductible health plan
- You want to give employees money for medical care whether they continue employment with your organization or not.
- You don’t offer a retirement account, but want to offer a blended option employees might withdraw from when they reach retirement age.
GCHRAs and HSAs are both good ways for organizations to supplement a group health insurance plan. Knowing which one is right for your organization depends on the type of group health plan you are offering and the level of flexibility and control you want over the benefit.
For a concise comparison of group coverage HRAs and HSA: