As insurance premiums and medical costs continue to increase, business owners are looking for new methods to lower their insurance related expenses. One common way of achieving this is by raising health plan deductibles. However, transferring the cost to workers can be problematic to employers, especially when it comes to hiring the top talent. Therefore, another option for dealing with rising deductibles is to package a medical plan which is high deductible with a HRA and HSA. Each can be used to fill the gap for a low and high deductible while simultaneously lowering insurance premiums.
Health Reimbursement Arrangement
Only business owners can make contributions to the HRA, not their employees. This means that the employer will maintain control over the funds until their employee files a claim. Each contribution made to the HRA is tax deductible, and to remain in compliance with the Affordable Care Act and Patient Protection Act, each HRA must be merged with group health insurance which is in compliance with ACA.
The biggest advantages of HRAs are that they give employers greater flexibility and control and it doesn’t have to qualify for HSA. Additionally, employers can establish a “use or lose” system, which lowers the cost of funding it. HRAs are compatible with the FSA and tend to be easier for employees to understand. Finally, whenever an employee leaves the company the funds for HRA will return to their employer. The biggest disadvantages of HRAs are that self-employed people are not allowed to participate, they require greater administration and they fall under ERISA regulations.
Health Savings Account
Employees own these accounts and thus can take them when they switch jobs. Unlike the HSA, employees can also make contributions, as can their employers. However, there is a maximum contribution limit which is government mandated. The HSA also provides many tax benefits, as the funds enter the account tax free and grow free of taxes as well. Withdrawals can also avoid taxation so long as they are for expenses which are qualified.
The biggest benefits of the HSA are that the costs are easier to predict since they are not associated with expenses, which can change annually. Cash flow can be enhanced by ensuring the contributions are spread out. The HSA is also easier to setup since it doesn’t involve a lot of administration. Employers also don’t have to worry about being held liable through the IRS if they ensure their employee has eligibility and they don’t exceed the maximum contribution limit.
Disadvantages to consider involving the HSA are that employees aren’t allowed to participate if they are covered under a medical plan which his non-qualified. Also, employees who are used to copay may not be thrilled with the benefits. The IRS rules regarding HSAs can be complex and penalties may be enacted if an employee is not eligible for contributions or errors are made. This will intimidate many workers and some may avoid treatment so that they don’t have to use their HSA balance.