HFSA, HRA, HSA– Things are Getting Confusing Around Here!

May 9th, 2008

Today there are a number of tax advantaged vehicles available to employers and employees to help them control the spiraling costs of health care.  With all these acronyms floating around, how does one keep from getting confused by them all?

More importantly, with all these different plans available, how does an employer decide what will work best for its business and employees?  Below is a brief description of these plans.

Health Flexible Spending Arrangement (HFSA)

A Health Flexible Spending Arrangement, sometimes called a Flexible Spending Account, is a plan that allows an employee to set aside amounts from his or her paycheck to be used to pay for qualified medical expenses.  The money that an employee had deducted from his or her paycheck is deducted on a pre-tax basis, resulting in payroll tax savings.  These plans can be offered by employers in conjunction with any type of medical plans offered by the employer.  These plans run on a “plan year” basis, in many cases a calendar year.  One of the drawbacks of these plans is that there is a “use-it-or-lose-it” provision.  This means that if an employee does not use all of the funds in the plan by the end of the plan year (or the time claims must be submitted after then end of the plan year), the unused funds will be forfeited.

Health Reimbursement Arrangement (HRA)

A Health Reimbursement Arrangement, also know as a Health Reimbursement Account, is funded exclusively through employer contributions.  These plans can be used in conjunction with the employer’s medical plans to reimburse qualified medical expenses designated by the employer.  These plans can be used with any type of medical plan.  If allowed by the employer, the funds can be carried over from one plan year to the next.  Additionally, the employer decides how much to contribute the plan and when amounts in the plan will be forfeited.

Health Savings Account (HSA)

Used in conjunction with a High Deductible Health Plan (HDHP), this is a special account which is owned by an individual and is used to pay for current and future medical expenses.  In order to be eligible, an individual must be covered by a HDHP, not covered by other health insurance, not enrolled in Medicare and not able to be claimed as a dependent on someone else’s tax return.  Contributions may be made by the employee, the employer or others on behalf of the individual.  There are maximum amounts that can be contribution to the plan on a yearly basis.  Additionally, for individuals age 55 and older, catch-up contributions may be made.  Unused funds can be rolled over from one year to the next.  As opposed to the other types of plans, funds can be used for any expenses the individual chooses and the employer cannot chose how the funds are to be used.  However, if the individual chooses to use the funds in the plan for non-qualified medical expenses, tax consequences and penalties may apply. 

This information is a just very general and brief overview of these arrangements.  There are many specific rules surrounding each of these plans that can be offered including rules relating to the establishment and administration of the plans and rules on how these plans may interact with other benefit plans.  Employers interested in controlling their health care costs would be well-served to consider these types of plans.  However, because of their complexity, benefit counsel and benefit professionals should be consulted before any decision is made on which plan to implement.  A good understanding of how these plans work and a review of the individual needs of the employer is essential to ensure the right fit for the employer.

4 Responses to “HFSA, HRA, HSA– Things are Getting Confusing Around Here!”

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