There are three different types of accounts, or arrangements, you can use to pay for medical expenses: a health savings account (HSA), health reimbursement arrangement (HRA) and flexible spending account (FSA). You can also offer more than one of these accounts to your employees.
These accounts are part of what’s called consumer-directed health care. Because of that, they’re all designed to have certain advantages, for both employer and employee:
- More control over your health care costs
- Potential tax savings—money that goes in and out of these accounts can be tax exempt or tax deductible
- Lower health care costs—consumer-directed health insurance plans are usually less expensive
Which one is best for you and your employees? We’ll try to help you decide. Managing health spending accounts is easy with our HSAs, HRAs and FSAs. For more information, contact an agent.
Health Savings Account (HSA)
What it is: Think of an HSA as a 401(k) retirement account for medical expenses. The employee owns the account and chooses what health care costs they want to pay from it.
What you need to know: An HSA must be paired with a high-deductible insurance plan. So if you want your employees to have an HSA, you have to offer a compatible plan.
Why it may be a good choice: An HSA offers a lot of tax savings and investment choices to employees, so it’s an attractive option. It also requires the least amount of management by the employer.
Health Reimbursement Arrangement (HRA)
What it is: An HRA is a fund employers set up for employees that pays for medical expenses not covered by their health insurance plan, like deductibles and coinsurance.
What you need to know: Only an employer can fund an HRA, decide how much to put in it and what health care costs it can be used for. HRAs require a higher level of administration.
Why it may be a good choice: If you like to budget for health care costs, an HRA might be right for you. You can decide in advance how much each employee will get in their fund. Employees can take advantage of payouts from an HRA no matter what kind of health insurance coverage they have.
Flexible Spending Account (FSA)
What it is: An FSA is a health care spending account. Employees put money into the account through payroll deduction before taxes. They can use the money to pay for qualified health expenses, child care and elder care.
What you need to know: Employers set up FSAs for employees and own the account. Employees put money into their FSA through payroll deduction only. Some employers let employees carry up to $500 into the next year. Otherwise, all money goes back to the employer at the end of the year.
Why it may be a good choice: Just want the basic benefits of consumer-directed health care—lower health insurance costs, tax savings and more say in spending on medical expenses? You and your employees might want to consider an FSA.