Consider the Many Benefits of Tax-advantaged Accounts: The ABC’s of HSAs, FSAs and HRAs
Most workers in the U.S. receive health insurance through an employment-based plan, with employers typically paying upwards of 70% of the cost of coverage for individuals and families.1
However, as health insurance costs have risen, employers are increasingly asking employees to pay a greater portion of the expense. A frequent approach is to offer tax-advantaged accounts that can help employees afford expenses beyond their contribution to premiums. These include Health Savings
Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs).
HSA, FSA and HRA plans can help your company in many ways. These tax-advantaged options demonstrate your commitment to providing quality benefits, which may help you attract and retain skilled employees. Also, supporting employees with out-of-pocket healthcare costs may provide peace of mind and minimize distractions that may impact performance.
Understanding the distinctions between various account types
Among the best-known tax-advantaged plans, HSAs can pay for current or future qualified medical expenses. They can also help pay for retiree health expenses. HSAs must be linked to a qualified HSA-compatible high-deductible health insurance plan, which generally features lower overall premiums.
While employers and employees can contribute to an HSA, the money in the account belongs to the individual and is completely portable. Money not spent in a given year remains in the account and may gain tax-free interest over time. By comparison, FSA monies can pay for medical and dental expenses not covered by insurance, including:
- Deductibles and copayments for medical, dental and eye care
- Certain over-the-counter medical devices and healthcare products including contact lenses and prescription eyeglasses
When employees create their FSAs, they estimate their family’s annual health expenses, and then choose how much to set aside pre-tax for that plan year. For 2013, the allowable amount is between $240-$2,500.2
Unlike an HSA, if an employee doesn’t use the money in an FSA by the end of the plan year, that amount cannot be carried over. If the funds are not used they are lost. Also, FSAs don’t have to be linked to a high-deductible health plan.
The third type of tax-advantaged account is an HRA. Unlike HSAs and FSAs, HRAs are 100% funded by the employer — no employee contribution is required. They can co-exist with any type of health plan, and be used to pay for deductibles, co-pays and other qualified medical expenses to soften the impact of healthcare expenses on employees. A significant advantage of an HRA is that any unspent funds are returned to the employer.
The ABCs of Healthcare Accounts: Comparison Chart
Each of these accounts has different advantages and all aspects should be carefully weighed. If you’re considering adding a tax-advantaged account to your benefits offering, call today — we’re here to help you analyze the options and find the best choice for your company.