<img src="//bat.bing.com/action/0?ti=5067266&amp;Ver=2" height="0" width="0" style="display:none; visibility: hidden;">
GET STARTED

Small Business Employee Benefits and HR Blog

Which Pre-Tax Healthcare Accounts are Available to Small Employers?

May 28, 2015
XL_office_desk_work_hero

Pre-Tax Healthcare AccountsAs small employers look for ways to contribute to employees’ healthcare expenses outside of a traditional group health insurance policy, one option is to offer a pre-tax healthcare account. There are several different account-based health plans available, each offering unique features and benefits.

As you evaluate if and how to offer employees a pre-tax healthcare account, the first step is to understand the options available and how they would work for your company and employees.

What is a Pre-tax Healthcare Account?

A pre-tax healthcare account is simply a way to give employees tax-free money (or tax-free reimbursement) for healthcare expenses. There are several different types available, each with unique rules about contributions, distributions, maximums, and qualified healthcare expenses. Pre-tax healthcare accounts may be offered alongside a group health insurance plan, or in many cases, offered as the main health benefit plan - instead of traditional health insurance.

What are the Different Types of Pre-tax Healthcare Accounts?

The most common forms include:

  • Health Savings Accounts (HSAs)

  • Health Reimbursement Arrangements (HRAs)

  • Health Reimbursement Plans (HRPs)

  • Health Flexible Spending Accounts (FSAs)

  • Premium Only Plans (POPs)

Health Savings Accounts (HSAs)

HSAs are individual bank accounts owned by employees that allow for tax-free payment or reimbursement of eligible medical expenses. An employer usually offers an HSA alongside an HSA-qualified high deductible health plan. For 2015, the annual HSA contribution limit for an individual is $3,350 (see: HSA 2015 rules).

Health Reimbursement Arrangements (HRAs)

Health Reimbursement Arrangements (aka Health Reimbursement Accounts or HRAs) are employer-funded plans used to reimburse employees tax-free for eligible medical expenses.

HRAs are commonly paired with a high-deductible health insurance plan to reimburse employees for their deductible expenses.

In some 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. (As of 2014, health reform has placed limitations on the use of Stand-alone HRAs for many employers. Types of stand-alone HRAs still available include Retiree HRAs and One-Person Stand-alone HRAs.)

Healthcare Reimbursement Plans (HRPs)

Healthcare Reimbursement Plans (HRPs) are employer-funded plans used for tax-free reimbursement of individual health insurance premiums. HRPs are specifically designed to comply with new health reform rules and regulations. HRPs are a type of Section 105 Medical Reimbursement Plan.

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 and there is a $2,500 annual contribution maximum (see: 2015 FSA Annual Contribution Limits).

Premium Only Plans (POPs)

A Section 125 Premium Only Plan (POP) is a cafeteria plan which allows employees to pay their health insurance premiums with tax-free dollars. Similar to FSAs, POPs are established by the employer, but funded by the employee. POPs are less common now because employees may not use them with subsidized health insurance policies purchased through the Health Insurance Marketplaces.

How do these healthcare accounts compare? Download the free PDF, “HSA vs. HRA vs. HRP vs. FSA Comparison Chart.”

Which Healthcare Account is Right for Our Company?

To help determine which type of pre-tax healthcare account 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

  • Whether having a company health insurance plan is required

  • Funds rollover

  • Administration/management

  • Portability

  • Requirement (if any) to pre-fund accounts

For example, with a Healthcare Reimbursement Plan (HRP), only the employer may contribute and there is no maximum annual contribution. Additionally, the employer only reimburses employees for what they use. With an HRP, the medical expenses allowed are limited to health insurance premiums and basic preventive care.

With a Health Savings Account (HSA), anyone may contribute and the maximum annual contribution is $3,350 for an individual. Unlike an HRP, the employer pays 100% regardless to employee utilization and employees must have a high-deductible health plan to be eligible for the HSA. Employees may use the HSA for qualified medical expenses, but not on health insurance premiums (except in limited situations).

Conclusion

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

Do you have questions about pre-tax healthcare accounts? Leave a question and we’ll be happy to answer it.

Learn the differences between HSAs, HRAs, and FSAs
Want to offer a QSEHRA without the hassle?
Let PeopleKeep automate your benefits for you.
SEE HOW IT WORKS
meeting_wide-1 CTA_purp_R