As healthcare costs continue to rise, many small and midsize employers are finding it more challenging to offer their employees a competitive health benefit while managing a limited budget.
One way employers can help their employees with the high cost of insurance is with an increasingly popular account-based health plan (ABHP). This type of formal health benefit can be helpful for recruiting and retaining top talent.
Account-based health plans like health reimbursement arrangements (HRAs), health savings accounts (HSAs), and flexible spending accounts (FSAs) all help employers cover their employees' out-of-pocket healthcare expenses. They can be used alone or paired with a high-deductible health plan (HDHP).
In this article, you’ll find a quick comparison chart of HRAs, HSAs, and FSAs to help you choose the best option for your organization.
Download a copy of our free HRA vs. HSA vs. FSA comparison chart!
Why should I offer an account-based health plan (ABHP)?
Before we dive in, let’s cover why ABHPs are valuable for small employers.
ABHPs allow small employers to use pre-tax money to help their employees with healthcare costs, allowing employees to save on out-of-pocket expenses. Employers can design an ABHP to best fit their organization's and employees' needs.
In most cases, you can pair a group health insurance plan with a medical spending account so it can serve as a supplement to your existing insurance if you already have a plan in place or hope to offer one in the future.
Or, you can design an account-based health benefit as a total replacement for a group policy, offering employees only a medical spending account. Under this type of benefit, employees can use their employer dollars to purchase an individual health insurance policy, pay for medical expenses, or even opt into a spouse’s health insurance policy.
What account-based health plan options are available?
The three accounts we’ll go over are the HRA, HSA, and FSA—each one allows employers to offer tax-free money to employees for qualifying medical expenses, but each works a little differently.
Health reimbursement arrangement (HRA)
First up is the HRA. Instead of an account your employees contribute to, this is an arrangement between you and your employees. You agree to make a certain allowance amount available to your employees for qualifying healthcare costs each month, and any unused balance at the end of the year goes back to you. With an HRA, you disperse money via reimbursement, unlike HSAs and FSAs.
HRA payments are tax-free to the organization and can also be tax-free to employees as long as the employees have minimum essential coverage (MEC).
PeopleKeep offers three HRAs that cater to any organization size or budget:
- Qualified small employer HRA (QSEHRA): An excellent option for small businesses with fewer than 50 full-time equivalent employees (FTEs). QSEHRAs have annual maximum contribution limits.
- Individual coverage HRA (ICHRA): Great for organizations of all sizes who want to offer a total replacement ABHP and offer different allowance amounts to certain employee classes.
- Group coverage HRA (GCHRA), also known as an integrated HRA: Allows you to supplement your existing group health insurance policy.
Health savings account (HSA)
Next is the HSA. An HSA is a special bank account that allows participants to save money—pre-tax—to be used specifically for medical expenses in the future. Account holders are typically issued a debit card to pay for healthcare items and other eligible expenses.
HSAs can be opened by an individual or offered by an employer with a high deductible health plan, but in either case, the individual always owns them.
Unlike an HRA, both you and your employee can contribute funds to this account, so it’s a combination of your employee’s money and money provided by your organization.
To contribute to an HSA, the employee must enroll in an HSA-qualified HDHP. All contributions remain in the HSA indefinitely until your employee uses them. There’s no vesting schedule or tax penalty if the money goes unspent, and the funds roll over yearly. But annual contribution limits control how much you can contribute in a given year.
Flexible spending account (FSA)
Finally, there’s the FSA. An FSA is another benefit plan that allows for tax-free reimbursement of qualified health expenses. These accounts are employer-owned, unlike an HSA.
Employees contribute to their FSA through payroll deductions (up to the annual contribution limit) taken out on a pre-tax basis. Just like an HSA, the employer can contribute funds as well.
But unlike an HSA, FSAs are tied to employment and are not maintained if the employee is no longer working for the employer.
There are also limitations to the rollover. Employers may allow up to $500 to roll over at the end of the year. Otherwise, the employee must forfeit unused funds at the end of the year.
Comparison chart
|
Comparison point |
HRA |
HSA |
FSA |
|
What is it? |
HRAs are employer-funded, tax-advantaged, employer health benefit plans used to reimburse employees for eligible medical expenses. As of 2020, there are six types of HRAs. |
HSAs are individual employee bank accounts that allow for tax-free payment or reimbursement of eligible medical expenses. |
FSAs are employer-established benefit plans that allow for tax-free reimbursement of qualified medical expenses. |
|
Who is eligible? |
All full-time employees with the possibility of including part-time employees. Owner eligibility is dependent on the business entity type. |
To contribute to an HSA, an employee must enroll in an HSA-qualified HDHP with no other major medical coverage. |
All employees that aren’t self-employed. |
|
Who owns the account/ arrangement? |
Employer. |
Employee. |
Employer. |
|
What is the average employer contribution cost? |
Only pay for employee utilization (typically 75%). |
100% paid regardless of utilization. |
100% paid regardless of utilization. |
|
Who can contribute? |
Only the employer. The employee cannot contribute their own money. |
Anyone, including the employee, employer, and others. |
The employee and employer if they choose. |
|
How much can be contributed each year? |
Contribution amounts are determined by their employer. However, the IRS does limit QSEHRA and EBHRAs. |
The 2023 IRS annual contribution limit is $3,850 for self-only coverage; $7,750 for family coverage. There are no limits to savings amount over time. |
Contribution amounts are determined by the employer but can't exceed the IRS annual limit of $3,050 in 2023. |
|
Is the account/ arrangement taxed? |
No, it’s tax-free. |
No, it’s tax-free. |
No, it’s tax-free. |
|
Is a health insurance plan required? |
No. The purchase of MEC allows reimbursements to be received free of income taxes. However, integrated HRAs require employees to enroll in their employer’s group health insurance policy. |
Yes. An HSA-qualified, high-deductible health plan is required. |
It depends. A limited-purpose FSA is an excepted benefit and does not require the purchase of insurance. A health FSA must accompany group insurance to comply with ACA market reforms. |
|
Are medical expenses allowed? |
Yes. Unreimbursed medical care expenses as defined by IRC 213(d); including health insurance premiums. |
Yes. Unreimbursed medical care expenses as defined by IRC 213(d); no health insurance premiums. |
Yes. Unreimbursed medical care expenses as defined by IRC 213(d); no health insurance premiums. |
|
Do unused funds carry over to the next year? |
Determined by the employer, the IRS states employers can allow: 1) Up to a $500 rollover, or 2) a 2.5 month grace period to use unspent funds, 3) no carryover to next year. |
Yes. |
Determined by the employer. |
|
Who is the plan administrator for the account/ arrangement? |
Employer or third-party administrator (TPA). |
Employee. |
Employer or third-party administrator (TPA). |
|
Is the account/ arrangement portable after the termination of employment? |
No. The account isn’t available if the employee no longer works for the employer. |
Yes. Employees have continued access to the account and all unused funds if the employee no longer works for the employer. |
No. The account isn’t available if the employee no longer works for the employer. |
Alternatives to account-based plans
Account-based plans may only work for some organizations due to their unique rules and regulations. But there are alternatives for many small to midsize businesses and nonprofits that can’t participate in a traditional health plan.
A health stipend is an excellent, hassle-free alternative to HRAs, HSAs, or FSAs. You can offer this taxable benefit to your employees as an upfront payment through a benefits expense card, like a lifestyle spending account (LSA). Or you can manage it like an HRA and reimburse your employees for their medical costs.
Like an HRA, employees can use health stipends on various expenses, including vision expenses, prescription drugs, insurance premiums, and out-of-pocket expenses. But, because they have fewer regulations and eligibility requirements than an HRA, employees can use them for practically any eligible expenses you allow.
If you want to offer a benefit for non-medical expenses, such as gym memberships and wellness apps, you can also provide a taxable wellness stipend.
A health stipend is an excellent choice for organizations employing 1099 contractors or international workers, as they’re eligible to participate. If you have workers who receive advance premium tax credits (APTC), a health stipend allows them to use their benefits while remaining eligible for their credits.
Remember that all employee stipend allowances that your employees use are considered taxable income, and you must report them on their Form W-2s.
Conclusion
As a small employer, you don’t have to limit your employees’ health coverage to manage costs. Several options are available to help you offer a quality health benefit on any budget. Whether you go with an HRA, HSA, FSA, or health stipend, your employees will get the flexible coverage they expect, and you’ll get an affordable option your organization can manage.
If you want to offer a flexible health benefit to your employees, PeopleKeep can help! Our personalized benefits administration software allows organizations like yours to manage and set up HRAs and employee stipends in minutes.
This blog article was originally published on January 1, 2017. It was last updated on August 2, 2023.
