HSAs, HRAs &FSAs

Which is Best for Your Company?

Is your business considering moving toward a consumer-directed healthcare plan to control employee healthcare costs? You are not alone. Thirty-eight percent of employers want to offer consumer-directed health plans during 2006, according to the Employee Benefit News/Forrester Research 2005 Benefits Strategy and Technology Study. Only 25 percent had offered these plans by the end of 2004. At that time, the plans were most popular among smaller employers (with fewer than 250 employees) and retailers—two industry sectors that are less likely to provide health benefits than others.

In general, a consumer-directed plan gives employees greater incentive to control their medical costs by providing them with a special account to pay healthcare costs. The types of consumer-directed accounts available include:

HSAs – Health Savings Accounts are tax-sheltered accounts from which consumers may pay HSA-specific qualified medical expenses. In order to enroll in an HSA, an individual must have a qualified high-deductible health plan, or HDHP. HSAs may be funded by contributions from employers, employees or both. An HSA must be held at a qualified financial institution. Employees retain control of their HSA accounts. Unspent balances roll over from year to year and follow the employee to subsequent employers.

HRAs – Health Reimbursement Arrangements are employer-funded accounts from which employees can receive reimbursement for qualified medical expenses, as specified in the plan documents. HRAs will work with any health plan, not just HDHPs, and give employers more control over employee health spending than do HSAs. For example, employers can specify what types of expenses an HRA will reimburse. They can also opt to limit the amount of unspent funds employees can roll over from one year to another. And any unused balances revert to the employer when an employee leaves the company.

Only employers may contribute to an HRA. These contributions are tax-free, with no maximum, although employers usually set their con­tributions below the annual deductible of the accompanying health insurance.

FSAs – Flexible Spending Accounts are also known as Section 125 plans after the part of the Internal Revenue Code that authorizes them. Em­ployees generally fund FSAs through a salary deduction agreement, but employers may also make contributions. Employees can use funds in their FSAs for specified expenses, such as health expenses or dependent care expenses. Unlike HRAs, FSAs are “use it or lose it” plans. This means that although employees determine how much of their salary to defer into an FSA, anything left at the end of the year goes to the employer to cover administrative costs. Self-employed people are not eligible for FSAs.

Employers can use FSAs and HRAs in conjunction with any health plan. But HSAs require participating individuals to be covered by an HDHP. To determine which type of consumer-directed plan is right for your company, determine whether you want to offer employees an HDHP or a more traditional health insurance plan, such as an indem­nity or preferred provider organization (PPO) plan. Generally, HDHP premiums are lower, but they also offer more limited coverage. And some employers worry that consumers often don’t have access to the informa­tion they need to make informed healthcare choices. In response, some insurers are starting to provide more information on the prices they negotiate with healthcare providers, or price ranges for certain procedures in a geographical area.

Saving for Retirement

Employees may be listening to their employers’ advice about retirement after all, according to a recent study by Hewitt Associates. Companies that help workers save for retirement—by putting 401(k) plans on autopilot, simplifying plan choices, and targeting communication—report 14 percent higher participation than the overall participation rate for employer retirement plans. For the greatest impact on overall participation and contribution levels, offer automatic enrollment to all employees or combine it with tools like streamlined enrollment and tailored communication. If your company already has automatic enrollment, you can encourage further savings by adding contribution escalation features or third-party investment advice.

Tips and Reminders

During Open Enrollment don’t forget about your COBRA members!

COBRA regulations require many notices. One that is often overlooked is the Open Enrollment Notification, a requirement that states employers must provide the same rights to COBRA qualified beneficiaries during an open enrollment period that are offered to active employees.

Protecting Your Employees is More Important than Ever

A new study reveals how little work time the average worker can afford to lose — for any reason. Should a personal crisis strike, nearly 75 percent of workers say they could afford to take one month or less of unpaid leave before expenses would force them to go back to work, according to a recent survey by the LIFE Foundation. Nineteen percent of employees said they could afford to take just one week of unpaid leave. Meanwhile, eight percent say they couldn’t afford any time off. Projections suggest that a significant number of 35-year-olds—nearly 30 thirty percent of women and 20 percent of men—will likely become disabled for a period of three months or more. Now may be the time to expand your company’s disability coverage.