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Small Business Employee Benefits and HR Blog

The 2-Minute Guide to Medical Expense Benefit Plans

September 2, 2015
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Medical Expense Benefit PlansMedical expense benefit plans offer employers a way to help employees with medical and health insurance expenses. Popular among smaller employers, medical expense benefit plans offer employers an affordable and attainable way to offer employee health benefits.

To help business owners wrap their head around how these type of benefit plans work, this article provides a two-minute guide to medical expense benefit plans.

What is a Medical Expense Benefit Plan?

A medical expense benefit plan is a broad term for a health benefit plan that provides employees with tax-free money for out-of-pocket medical expenses, including, in some cases, individual health insurance premiums.

Common Types of Medical Expense Benefit Plans

There are several different types of plans available. The most common type of medical expense benefit plans include:

  • Health Reimbursement Plans (HRPs)

  • Health Reimbursement Arrangements (HRAs)

  • Health Savings Accounts (HSAs)

  • Health Flexible Spending Accounts (FSAs)

Health Reimbursement Plans (HRPs)

Health Reimbursement Plans, or HRPs, are benefit plans that allow for tax-free reimbursement of health insurance premiums and preventive care. With HRPs:

  • All contributions must come from the employer (employees may not contribute)

  • The employer owns the funds and pre-funding of third-party bank accounts is not required.

  • There are no minimum or maximum contribution amounts.

HRPs are often the foundation of premium reimbursement or “pure” defined contribution health benefit models.

Learn more about HRPs.

Health Reimbursement Arrangements (HRAs)

Health Reimbursement Arrangements (aka Health Reimbursement Accounts or HRAs) are benefit plans that allow for tax-free reimbursement of out-of-pocket medical expenses, and in some cases health insurance premiums. With HRAs:

  • All contributions must come from the employer (employees may not contribute)

  • The employer owns the funds and pre-funding of third-party bank accounts is not required.

  • There are no minimum or maximum contribution amounts.

A common practice is to pair an HRA with a high-deductible health insurance plan to reimburse employees for deductible expenses.

In limited situations, HRAs may be offered as a stand-alone health benefit used to reimburse employees for eligible individual health insurance premiums and/or out-of-pocket medical expenses.

Read more about HRAs.

Health Savings Accounts (HSAs)

HSAs are individual bank accounts owned by employees that allow for tax-free payment or reimbursement of eligible out-of-pocket medical expenses, and in some limited situations, health insurance premiums. With an HSA:

  • Enrollment in a high-deductible health plan is required.

  • For 2015, the annual HSA contribution limit for an individual is $3,350.

  • Employees own the funds; they are not tied to employment.

Read more about HSAs.

Health Flexible Spending Accounts (FSAs)

Health FSAs are employer-established benefit plans that allow for tax-free reimbursement of qualified medical expenses.

  • Most often, FSAs are employee-funded.

  • The annual contribution limit is $2,500 for 2015.

  • The funds are tied to employment.

Read more about FSAs.

Identifying the Right Plan for Your Business

To help determine which type of benefit plan is right for your company and employees, consider these different features:

  • Who may contribute

  • Cost of employer contributions

  • Maximum annual contributions

  • Medical expenses allowed

  • Tax treatment

  • Employee eligibility requirements

  • Requirement (if any) to have a certain kind of health insurance plan

  • Rollover of funds

  • Administration/management requirements

  • Portability

  • Requirement (if any) to pre-fund accounts

For a side-by-side comparison, download this PDF chart.

Conclusion

Medical expense benefit plans such as HRPs, HRAs, HSAs, and FSAs offer small employers a way to offer health benefits, with or without a traditional health insurance plan. Which type of benefit plan is right for your company? First, understand how each of the medical expense benefit plans work. Then, determine which type of plan will help you achieve your health benefit goals.

What questions do you have about medical expense benefit plans or how small employers use them? Leave a comment or question below.

Learn the differences between HSAs, HRAs, and FSAs

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