Currently, there are three main medical expense reimbursement benefit options. To help clarify which benefit will help your small business achieve its goals, here's a simple breakdown of the three benefits.
In this article, we’ll cover:
- Health Savings Accounts (HSAs)
- Health Reimbursement Arrangements (HRAs)
- Flexible Spending Accounts (FSAs)
Health Savings Accounts (HSAs)
An HSA is an individual bank account owned by an employee that allows for tax-free payment or reimbursement of eligible medical expenses.
While HSAs are often offered alongside a company-sponsored high-deductible health plan (HDHP), individuals can actually set them up and contribute to them on their own.
Here are the key HSA features:
- Eligible medical expenses include unreimbursed medical care (as defined by the IRS) and insurance premiums only for unemployed individuals.
- Must have a high-deductible health plan to open an HSA.
- Employee owned and portable after termination.
- Anyone may contribute (company, employee, etc.).
- There are annual contribution limits ($3,500/year for single and $7,000/year for family in 2019).
By contributing to employees' HSAs, small businesses can offer valuable tax-free money, which employees use on the health care services they prefer. However, employees without HSAs won't get much value from this benefit.
Note: HSAs can be offered in conjunction with HSAs. Find out how here.
Health Flexible Spending Accounts (FSAs)
Health flexible spending accounts (FSAs) offer a tax-free way for employees to save for qualified medical expenses during a single year. FSAs can be paired with any group health policy or used alone. Funds expire if not used by the plan year-end.
Here is a summary of FSA features:
- Eligible medical expenses include out-of-pocket medical expenses (as defined by the IRS), excluding insurance premiums.
- Must be established by a company.
- Can be funded by employees or the company.
- Maximum annual contribution limit: $2,700 per employee.
Health Reimbursement Arrangements (HRAs)
A health reimbursement arrangement (HRA) is a company-funded health benefit used to reimburse employees for out-of-pocket medical expenses, potentially including individual health insurance premiums.
Currently, there are three HRAs small businesses can use to offer health benefits to current employees:
- The group coverage HRA. Often paired with high-deductible health plans, group coverage HRAs allow businesses to offer a monthly allowance of tax-free money to employees enrolled in the group policy. Employees buy the health care that fits their personal needs and the business reimburses them up to their allowance amount.
- The one-person stand-alone HRA. One-person stand-alone HRAs are offered to just one employee. With the HRA, this employee is given a monthly allowance of tax-free money. The employee buys what fits their personal needs, potentially including an individual health insurance policy. The employee then submits the expenses for reimbursement and, if the expenses are qualified, the business reimburses the employee up to their allowance amount.
- The qualified small employer HRA (QSEHRA). Created specifically for small businesses with fewer than 50 employees, the QSEHRA is the only reimbursement benefit that's available for multiple employees and is also unattached to a group policy. With the QSEHRA, the business sets an allowance of tax-free money and employees buy the health care that fits their personal needs, potentially including an individual health insurance policy. The employee then submits the expenses for reimbursement and, if the expenses are qualified, the businesses reimburses the employee up to their allowance amount.
There are also two additional HRAs coming in 2020: the individual coverage HRA (ICHRA) and the excepted benefit HRA. The ICHRA is expected to be the more popular of the two, and functions much like the QSEHRA. However, the two have important differences businesses should consider when deciding between the two.
HRAs are the truest health reimbursement benefit a small business can offer. For this reason, the QSEHRA continues to be one of the most popular formal health benefits for small businesses outside of group health insurance.
If your small business is looking to reimburse employees for medical expenses, there are three main types of reimbursement benefits to evaluate: HSAs, FSAs, and HRAs. Which is the right plan? The answer depends on a few factors such as which type of expenses the company would like to reimburse, how much the company wants to contribute (if any), and flexibility of the plan for the company and employees.
In general, though, the QSEHRA delivers the best return on benefits dollars. With the QSEHRA, businesses can set their own budget and employees are free to purchase they health care they want most. It's a formal, tax-free benefit and it's already helped more than 8,000 small businesses hire and keep talented employees since its creation in 2016.
What questions do you have about how to reimburse employees for medical expenses? We’d love to hear from you. Leave a comment or question below.
Editor's Note: This post was originally published on May 25, 2016. It has been updated to reflect the most currently options.