As healthcare costs continue to rise, small employers need a way to offer their employees a competitive health benefit to compete with larger organizations while still managing a limited budget.
One way small employers can avoid high insurance costs while still offering a formal health benefit to recruit and retain top talent is an account-based health plan (ABHP).
Plans like health reimbursement arrangements (HRAs), health savings accounts (HSAs), and flexible spending accounts (FSAs) are all ABHPs that are growing in popularity. In fact, Willis Towers Watson’s Best Practices in Health Care survey reports 84% of employers offered an ABHP in 2019.
In this article you’ll find a quick comparison chart of the three most popular ABHPs: HRAs, HSAs, and FSAs so you can understand your options and choose the one that’s best for your organization.
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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 their out-of-pocket expenses. Employers have the ability to design an ABHP to best fit the needs of their organization and their employees.
What’s more, oftentimes you can choose to pair a group health insurance plan with your ABHP, so it can serve as a supplement coverage to your traditional insurance if you already have a plan in place, or if you hope to offer one in the future.
Or, you can design a total replacement ABHP where only a medical spending account is offered to employees. Under this type of ABHP, 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.
Want to cancel group health insurance and use an ABHP instead? Our tool kit can help you get started
What account-based health plan options are available?
The three ABHP we’ll go over are the HRA, HSA, and FSA—each one allows employers to offer tax-free reimbursements to employees for qualifying medical expenses, but they each work a little differently.
Health reimbursement arrangement (HRA)
First up is the HRA. Instead of an account that 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 healthcare costs each month, and any unused balance at the end of the year goes back to you.
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)
- A simple, controlled-cost alternative to group health insurance for employers with fewer than 50 full-time employees.
- Individual coverage HRA (ICHRA)
- A flexible health benefit solution that can be used alone or alongside group health insurance for organizations of all sizes.
- Group coverage HRA (GCHRA)
- Sometimes called an integrated HRA, a GCHRA is a group health supplement to help employees with out-of-pocket expenses.
Take our quiz to see which HRA is best for your organization
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.
All contributions remain in the HSA indefinitely until your employee uses them. There’s no vesting schedule, no penalty if you the money isn’t used, and the funds roll over year to year. However, there are annual contribution limits that control how much you can contribute in a given year.
Did you know you can use both an HSA and an HRA? See how in our guide
Flexible spending account (HSA)
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.
Learn more about whether an HRA, HSA, or FSA is best for your organization
|
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 bank accounts owned by employees 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 dependent on business entity type. |
To contribute to an HSA, an employee must be enrolled in a 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 2021 IRS annual contribution limit is $3,600 for self-only coverage; $7,200 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 $2,750 in 2020. |
|
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. |
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 would need to 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. |
Conclusion
As a small employer, you don’t have to limit your employees’ health coverage in order to manage costs. There are several options available to help you offer a quality health benefit on any budget. Whether you go with an HRA, HSA, or FSA, your employees will get the flexible coverage they expect and you’ll get an affordable option your organization can manage.
This article was originally published on January 1, 2017. It was last updated May 20, 2021.
