Traditional health benefits have been going up in cost for years. Since 2006, healthcare costs have tripled compared to how much compensation has increased. Because of this, innovative solutions have been developed to mitigate those rising costs without sacrificing the quality of benefits and coverage.
HSA, FSA, and HRA are all tools that serve as innovative options for employers to cut costs while also taking care of their team. But one of the greatest difficulties employers face is 96% of their employees don’t understand the basics of health insurance, let alone how to use these tools properly.
Before we dive in, let’s ask a very important question: Why overspend on a traditional group plan when it is typically underutilized?
Only around 3-5% of people hit their out-of-pocket max every year, and the average American only goes to the doctor 2-3 times per year. Considering that preventative coverage is free for well visits, vaccines, screenings and more (not to mention free telehealth), the reality is that medical expenses are not as common as you may think.
This is why HSA, FSA, and HRAs were developed; so you could purchase a “lower quality” plan that’s cheaper, but then pair it with medical dollars to make it equivalent to a standard level of coverage. The net risk remains the same (if not better), but you only pay for medical services when you actually need them.
Let’s dive into the basic definitions of these three tools:
What is an HSA?
An HSA is a Health Savings Account where you can save untaxed money for medical expenses.
What is an FSA?
An FSA is a Flexible Spending Account where you have access to untaxed money for medical expenses.
What is an HRA?
An HRA is a Health Reimbursement Arrangement where you can be reimbursed for qualified medical expenses under the specific details of your arrangement with your employer.
On average, adopting these strategies can save anywhere from 10-30% on costs. So let’s take a deeper look HSA, FSA, and HRA.
1. Health Savings Account (HSA)
An HSA, which stands for Health Savings Account, is just that: a savings account that you personally own. Often, you can open an HSA with your local bank. You become eligible to open an HSA when you are on a High Deductible Health Plan (HDHP). The IRS regulates this type of plan, and the numbers vary each year.
The money that goes into this savings account can come from either the employer or the employee. But no matter who it comes from, this is your own money to spend… or to save. The money rolls over every year, can be accumulated over time, and is allowed to grow on interest tax free.
When you have an HSA, you’ll also be enrolled in a High Deductible Health Plan (HDHP), which by design is cheaper and offers less coverage. This is intentional, since it allows you take the monthly savings (from the HDHP) and actually save it (in your HSA).
HSAs are also extremely easy to utilize, which makes it another great option for many employers. Employees receive a debit card attached to the account which functions just like any other debit card. Using that debit card, they may spend their HSA dollars tax free on eligible medical expenses according to IRS Section 213 (d). It can be used at the pharmacy, the doctor’s office, the chiropractor, and more.
Employers will often offer HSA contributions when an employee selects an HDHP. We recommend that employees also contribute up to the IRS limit every year for HSA contributions. Remember, if you don’t use it, you keep it, and have it for whenever you do need it!
2. Flexible Spending Account (FSA)
FSAs are similar to HSAs in many respects. With a Flexible Spending Account, you also have a debit card that is attached to the medical dollars available in the FSA. The money can come from either the employer or the employee. At the beginning of the plan year, both the employer and employee commit to how much they will put into the FSA for the whole year. Then each month, that money is sent over to the account.
One benefit of the FSA model is that the entirety of the money is available at the beginning of the plan year, regardless of how much money has actually been put into the account. This means that you are not allowed to stop contributing to the FSA midyear; you are liable for that entire amount (with very few exceptions). Whereas HSAs users are limited to the accrued dollars placed into the account each month, FSAs are ready to go from the very start.
Like HSAs, FSA dollars can be used on eligible IRS Section 213 (d) medical expenses. Furthermore, the IRS limits how much you can contribute toward your FSA each year. For FSAs, though, it is broken down between both medical and childcare, which means you can use your FSA for qualified childcare expenses (another benefit of lowering your annual tax liability).
However, there are also some distinct differences between FSAs and HSAs. For example, Flexible Spending Accounts emphasize spending, which means if you don’t use it, you lose it! While there are some provisions that may be made by the employer, usually your unused FSA dollars will expire at the end of the plan year.
3. Health Reimbursement Arrangement (HRA)
HRAs are similar to HSAs and FSAs in that they help pay for your qualified expenses and lower your overall medical spend. However, HRAs involve a few extra moving parts. Employers enjoy HRAs because they’re extremely customizable and can be designed to your team’s specific needs. Keep in mind, though, that HRAs take a little more effort to set up and utilize.
HRA stands are Health Reimbursement Arrangement. This arrangement is an agreement from the employer to the employee for an amount of money they have allocated to reimburse toward qualified medical expenses. This money is exclusively from the employer.
There is a lot of freedom in designing an HRA. Sometimes they cover the Frontend expenses, sometimes they cover the Backend expenses, or sometimes they Leapfrog back and forth.
Unlike HSAs and FSAs, you may or may not have a card with an HRA. Instead, you’ll most likely have a form (usually online) to fill out and submit along with your eligible medical bill and the explanation of benefits (EOB). This form is most often submitted to a third-party administrator, also called a TPA for review.
Each HRA has its own unique rules on what is covered, how much is covered, and when it’s covered. That’s why it’s important to read through the details of your HRA to know what you’re responsible for.
For example, say your employer commits to cover $1,000 of your expenses after you pay $1,000 yourself. In order to be eligible for those HRA dollars, you’ll need to submit proof of both the charge you need reimbursed and the bills preceding those expenses to prove you have reached the $1,000 threshold.
Sometimes HRA dollars rollover to the next year, but most often they expire annually, just like FSA dollars. While some HRAs are designed to actually pay your bill, they are usually just reimbursed. Depending on the TPA and submission system, you could see anywhere from 30-90 days of processing time before receiving your reimbursement, so be sure to budget accordingly.
Want to use an HSA, FSA or HRA to help your team spend better?
If you are a team leader and want to learn more about how an HSA, FSA or HRA could lower your costs without cutting coverages for your team, connect you with one of our expert benefits consultants! Our free evaluation will help you explore the complete spectrum of solutions available to you to help you design a custom solution that meets the needs of your team and the goals of your organization.
Over the past 3 years, Remodel Health has helped its customers save $23 million on health benefits, without cutting coverages. If you’re ready to learn more, visit remodelhealth.com/quiz or email us at [email protected] to rethink employee health benefits.
Important Notice: Remodel Health does not intend to provide specific insurance, legal, or tax advice. Remodel Health always recommends to consult with your own professional representation to properly evaluate the information presented and its appropriate application to your particular situation.