Health reimbursement arrangements (HRAs) and health savings accounts (HSAs) share important characteristics: Both allow for tax-free reimbursement of medical expenses and both can encourage employees to have more awareness of how they’re spending their health care dollars, and thus develop more conscious health care consumerism. However, HRAs and HSAs differ in a number of important ways. Therefore, if you are considering adding some type of health care account to your health benefits program, you should exercise care and be sure to understand the ins and outs of both types of accounts, so as to choose the one that is a better fit for your company, as well as your employees.
The following are some of the points that distinguish HRAs from HSAs:
Funding. Only the employer contributes to an HRA (the HRA is a notional account, with contributions made to cover claims as they are incurred). The employer, the employee, or both contribute to an HSA, which is set up as a trust or custodial account. Contributions to both HRAs and HSAs are tax-advantaged (as a deductible business expense for the employer, or made on a pretax basis by the employee; and employer contributions are not taxable to the employee).
Design requirements and flexibility. HSAs must be offered in conjunction with a high-deductible health plan, and are subject to annual account limits and limits on annual out-of-pocket expenses. HRAs do not have these requirements. Other than preventive care, an HSA will cover expenses according to the accompanying high-deductible health plan’s deductible and copay requirements. In contrast, the employer can design coverage features in the HRA as it chooses and, for example, provide first-dollar coverage for selected benefits (or providers).
Unspent money and portability. An HSA is an account owned by the employee. As such, unused amounts stay in the account year to year, with no limit on accumulations, and the account goes with the employee when leaving the company. With an HRA, the employer will determine by plan design whether unused funds roll over from year to year, and whether employees will receive any remaining account balances upon termination (and, generally, they do not).
So which type of fund makes the most sense for your company? Consider what you are trying to accomplish through the account. Both HRAs and HSAs can encourage conscientious health care spending. However, because unused funds carry over year to year, stay with employees when they leave your employment, and may involve the employee’s own money – all factors which generate a feeling of having a greater stake in the money – HSAs are likely to make employees most conscious of their health care spending. The selling point for many employers that choose an HRA is flexibility, in design and in funding. An employer can link an HRA to a health plan of its choosing-and not just a high-deductible health plan-and tinker with HRA design to encourage/discourage use of certain services or providers. Furthermore, an HRA can be easier on a company’s cash flow, since regular contributions are not required and claims are reimbursed as they are incurred.
Both an HRA and an HSA can add a new dimension to your health plan program, in addition to creating the prospect of saving money on your company’s health plan costs. Carefully consider what you are trying to accomplish through the account, and how it fits in with your health benefits and overall benefits program. Regardless of which approach you take, it’s likely to be a new way to look at health care for your employees, so be sure to use comprehensive communications when implementing any changes.
