Taking the Mystery Out of the Rules About Pairing a High Deductible Health Plan With a Payment Account Like an HSA, HRA or FSA.
Employers are looking to consumer-driven health plans to help control their health care costs and provide the best choices for their employees. The term “consumer-driven healthcare” (or CDH) describes more than just a type of insurance plan.
Today’s consumer-driven plans often consist of a high-deductible health plan (HDHP) coupled with an employer-funded medical payment account. The payment account attached to the HDHP is meant to pay for out-of-pocket expenses that are incurred before the insurance plan’s deductible is met. That payment account can be in the form of a Health Reimbursement Arrangement (HRA), Flexible Spending Account (FSA) or a Health Savings Account (HSA).
High-Deductible Health Plan (HDHP)
With most HDHPs, you don’t have copayments for most services. Instead, you pay all medical expenses out of pocket until you meet your deductible. This is a profound and unwelcome change for many individuals. That’s why it’s a good idea to have a tax-favored account like an FSA, HRA or HSA to cover deductible expenses.
If you have made the decision to move to a CDH plan and will offer your employees an HDHP, which employer-funded payment plan do you pair with the insured plan – an HRA or HSA? Both types of accounts have distinct advantages and disadvantages.
We believe the best decision is what works for your group, and should be based on your objectives. It is unlikely that one plan will meet all of your needs, but you might find that more elements of an HRA or HSA fit your needs, and that should help you with your decision. BASIC NEO has prepared this summary in an effort to help you make informed choices.
Health Reimbursement Arrangement (HRA)
A Health Reimbursement Arrangement (HRA) is an employer-funded reimbursement account that repays participants for qualified medical expenses. HRAs can be paired with any kind of insured health plan (no eligibility restrictions like HSAs), and qualified expenses can be defined by the employer. The funds are owned by the employer, not by the employee, and they may not be withdrawn for nonmedical expenditures.
Typical HRA plan designs connected to the HDHP allow reimbursement of some or any combination of the following:
- Medical services applied to the insured plan’s deductible, up to a specified limit
- Prescription drugs (a debit card may be available for certain prescription HRA plans)
- Reimbursement for co-pays or coinsurance
- Specified categories of expenses, like dental or vision care
- A “post-deductible” HRA that will only pay medical expenses after the participant has met a specific amount of their insurance deductible in order to remain eligible to contribute to an HSA (see below).
Health Savings Account (HSA)
An HSA is a bank account owned by an individual where contributions to the account are used to pay for current and future medical expenses. Contributions to HSAs are tax-free, interest accumulates tax-free, and distributions are tax-free when used to pay for qualified medical expenses.
Eligibility: HSAs have strict eligibility and contribution rules, and care must be taken to educate employees about these rules. In order to be eligible to make or receive tax-free contributions to an HSA, an individual must meet both of the following requirements:
1) Must be covered under a “qualified” HDHP that has minimum deductibles which are indexed by the IRS annually for inflation. The HDHP cannot have prescription drug or office visit co-pays until a statutory minimum deductible is met. Instead, the full discounted expense is applied to the deductible of the insurance plan and paid by the employee.
2) Cannot be covered under any other health plan that provides the same benefits as the HDHP. An individual who is covered under a general – purpose health FSA or HRA is not eligible to make contributions to a HSA. This applies to any health coverage that they may have through their spouse, so employers may wish to consider advising employees that they will not be HSA eligible if their expenses can be covered under a spouse’s FSA or other non HDHP coverage. The individual may, however, be covered by “permitted” insurance or coverage in addition to the HDHP, including a “limited” health FSA or HRA without losing HSA eligibility. The limited FSA or HRA must be carefully crafted and documented to define certain specific reimbursable expenses (generally only dental, vision, preventative care or coverage for medical expenses that exceed the statutory minimum HSA deductible).
Contributions: Deposits to an HSA can be made by the employee or employer up to the maximum cap determined by the IRS each year. An additional $1,000 catch-up contribution can be made annually for eligible individuals age 55 or older.
Withdrawals: The account holder (employee) has full control over funds and free access for withdrawals. Amounts distributed for qualified medical expenses are tax free. HSA funds withdrawn for purposes other than health care expenses are subject to income taxes plus a 20 percent penalty.
HSAs roll over from year to year, and because the HSA account belongs to the individual, the account is portable if the individual changes jobs.
Health Flexible Spending Account (FSA)
Many employers already have a Flexible Spending Account (FSA) place and may want to continue to offer that benefit for employees who do not choose the HDHP/HSA option. You can have both, but need to carefully craft your plan design and consider timing issues to remain in compliance with IRS regulations.
An individual who is covered under a general – purpose health FSA or HRA is not eligible to make contributions to a HSA (see HSA eligibility rules above). So it is important to limit enrollment in the FSA to employees who are not in the HDHP or do not want to use an HSA. That can pose problems if the enrollment in the HDHP does not coordinate with the plan year enrollment for the FSA.
Options for Adding a HDHP/HSA Benefit Midyear
If the individual is a participant in an FSA, they will not be eligible for HSA contributions until the end of the Plan Year for the FSA, even if the health FSA balance has been exhausted. IRS guidance 2005-38 confirmed again that the introduction of a new benefit such as an HSA is not a qualified change of status that allows a change in the health FSA election, so they cannot choose to drop their FSA coverage.
Employer plans to add a HDHP/HSA benefit as an option during open enrollment for the insurance plan midyear. Employer will also continue to offer the traditional plan. If an employee is currently participating in the health FSA, that coverage would disqualify him from establishing a HSA. He could still elect the HDHP coverage for a lower premium, but could not contribute or receive employer contributions to the HSA until the end of the FSA plan year.
Solution: We encourage employers to change the FSA plan year to match the insurance enrollment anniversary date to eliminate election lock for ensuing years. If open enrollment for insured coverage, HSA coverage and FSA coverage are all at the same time, employees can coordinate their benefits, maximize their options and no one is hindered by what type of coverage they have.
BASIC NEO has extensive experience working with HSA, HRA and FSA plan design and consulting. We have a great deal to offer in the area of providing business with health benefit plan solutions that meet their unique needs, including consulting and design expertise as well as our comprehensive administration services. Partnering with your insurance broker or consultant, BASIC NEO can offer some creative ideas that will help you find the best solution for your group.