Choosing an employer-sponsored benefit account for employees can be a difficult task. Today, employers have access to several main types of savings accounts, including HSAs, HRAs and FSAs. These types of accounts can help pay for qualified health care expenses for employees and their dependents. They can also be used to save on taxes.
What Is A Health Savings Account?
A health savings account can help workers pay for certain medical, dental, vision and prescription expenses. Before making a decision to use a health care expense account, take the time to compare and contrast these three types of benefit accounts.
Health Savings Account (HSA)
A health savings account is similar to a personal savings account in which the account holder owns and controls the money in the account. However, the funds can also be used to pay for qualified health care expenses. To be eligible for an HSA, a person must first enroll in a High-Deductible Health Plan (HDHP).
An HSA is often recommended to people with HDHPs to cover out-of-pocket costs. There are several benefits to opening a health savings account, including tax perks. Contributions made to an HSA are not usually subject to federal income tax, allowing the money in the account to grow tax-free.
At the end of the year, any leftover funds in an HSA roll over to the next year and remain available for medical expenses in the next year. Withdrawals from an HSA for approved medical services are not subject to federal taxes, and in many cases, state taxes. Contributions made to an account using after-tax dollars can be deducted from the gross income of the account holder’s tax return which can help reduce their tax bill.
Contributions to a health savings account can come from an employee, relative, employer, or anyone else that would like to contribute. However, there are contribution limits set by the IRS on an annual basis. In 2021, the HSA contribution limit is $3,600 for an individual and $7,200 for a family, and the maximum out-of-pocket is capped at $7,000.
Health Reimbursement Arrangement (HRA)
A health reimbursement arrangement is a type of employer-funded benefit plan used to reimburse employees for qualifying medical expenses. Employers can claim tax deductions for reimbursements made through these plans, and any reimbursement funds are given to employees tax-free with an HRA. Unlike an HSA that can be funded by both employers and employees, only employers fund HRAs.
HRAs are tax-advantaged accounts that are designed to reimburse employees for any out-of-pocket medical expenses and sometimes personal health insurance premiums.
An HRA enables employees to pay for various medical expenses that may not be covered by insurance. It is also an excellent option for small businesses that cannot afford their employees’ group health insurance.
All HRAs are different, but most feature a similar structure. Businesses decide how much money they want to offer employees every month, which represents the max amount the business is willing to reimburse employees. Workers can then make health-related purchases and submit documentation of these expenses. The business then reviews the documents and reimburses employees.
Flexible Spending Account (FSA)
A flexible spending account is a type of savings account that offers account holders unique tax benefits. Also referred to as a flexible spending arrangement, an FSA is either set up by an employer or employee and allows either party to contribute to the account. Any distributions from an FSA must be used to reimburse the employee for qualified medical or dental expenses.
FSAs allow account holders to pay out-of-pocket medical expenses using tax-free dollars. Eligible expenses include insurance deductibles and copayments, insulin, medical devices and qualified prescription drugs. Employees have control over how much money they would like to contribute to an FSA up to the limit set by the employer.
If there is any money left in the account at the end of the year, employees have two options. First, an employee can choose to get an additional 2.5 months to spend the leftover funds. Another option includes carrying over up to $500 to spend in the next year on qualified expenses. The IRS also limits how much can be contributed to an FSA account each year. In 2021, the annual contribution limit per employee is $2,750.
Choosing Between an HSA, HRA and FSA
There are several similarities between an HSA, HRA and FSA. All three types of savings accounts are sponsored by employers and aim to offset the high cost of medical care. These accounts also have tax-advantaged contributions and enable account holders to take more control over their personal healthcare needs.
When choosing an employer-sponsored health savings account for employees, it is important to consider which type of account would offer the most benefits to staff and also fits into the organization’s budget. To learn more about the differences between an HSA, HRA and FSA, or to speak with an insurance expert about acquiring a savings account for your business, contact New City Insurance.