As healthcare costs continue to rise, small and midsize employers are searching for a way to offer their employees a competitive health benefit to compete with larger organizations while managing a limited budget.
Employers can avoid high insurance costs while offering a formal health benefit to recruit and retain top talent with an increasingly popular account-based health plan (ABHP).
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 alone or when 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 your own 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 reimburse their employees for healthcare costs, providing a way for 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 coverage to your traditional insurance if you already have a plan in place or hope to offer one in the future.
Or, you can design a total replacement benefit where only a medical spending account is offered to employees. 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, money is dispersed 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 and nonprofits 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.
HSAs can be opened by an individual or offered by an employer with a high deductible health plan, but in either case, they’re always owned by the individual.
Unlike an HRA, both you and your employee can contribute funds to this account, so it’s a combination of your own money and money provided by your organization.
However, an HSA requires a HDHP that meets certain criteria in order for the HSA to be tax-advantaged.
All contributions remain in the HSA indefinitely until your employee uses them. There’s no vesting schedule or penalty if the money isn’t used, and the funds roll over yearly. However, 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 employer-established benefit plan that allows for tax-free reimbursement of qualified medical expenses. In this case, it’s owned by the employer, not the employee like 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.
However, 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, any unused funds are forfeited 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. There are six different types of HRAs in 2020. |
HSAs are individual employee bank accounts that allow for tax-free payment or reimbursement of eligible medical expenses. |
Flexible spending accounts (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 be enrolled in an HSA-qualified high deductible health plan (HDHP) with no other major medical coverage. |
All employees, not 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 determined by their employer. However, the IRS does limit QSEHRA and EBHRAs. |
The 2022 IRS annual contribution limit is $3,650 for self-only coverage; $7,300 for family coverage. There are no limits to savings amount over time. |
Contribution amounts determined by the employer, but cannot exceed the IRS annual limit of $2,850 in 2022. |
|
Is the account/ arrangement taxed? |
No, tax-free. |
No, tax-free. |
No, tax-free. |
|
Is a health insurance plan required? |
No. The purchase of minimum essential coverage (MEC) allows reimbursements to be received free of income taxes. However, group health insurance is required for integrated HRAs. |
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 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 funds, 3) no carry over to next year. |
Yes. |
Determined by the employer. |
|
Who administers the account/ arrangement? |
Employer or third party administrator (TPA). |
Employee. |
Employer or third party administrator (TPA). |
|
Is the account/ arrangement portable after termination of employment? |
No. Account cannot be maintained if the employee is no longer working for the employer. |
Yes. Continued access to unused account balance if the employee is no longer working for the employer. |
No. Account cannot be maintained if the employee is no longer working for the employer. |
Alternatives to account-based plans
Account-based plans may not work for every organization due to their special rules and regulations. With traditional health plans out of reach for many small to midsize businesses and nonprofits, what are the alternatives?
A health stipend is an excellent hassle-free alternative to HRAs, HSAs, or FSAs. This taxable benefit can be offered as an upfront payment to your employees through a benefits expense card. Alternatively, you can manage it like an HRA where you reimburse your employees for their medical expenses.
Like an HRA, health stipends can be used for a variety of expenses, including vision expenses, prescription costs, 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 that you allow.
If you want to offer a benefit for non-medical expenses, such as gym memberships and wellness apps, you can also offer a taxable wellness stipend.
A health stipend is great for organizations that employ 1099 contractors or international workers, as they can take advantage of their benefits. If you have workers who receive advance premium tax credits (APTC), a health stipend allows them to use their benefits while still remaining eligible for their credits.
Keep in mind that all employee stipend allowances that your employees use are considered taxable income and must be reported on their Form W-2s.
Conclusion
As a small employer, you don’t have to limit your employees’ health coverage in order 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 June 30, 2022.
