How to Trim Healthcare Costs with HSAs and HRAs

HSAs (Health Savings Accounts) have been the topic of much debate lately as employers investigate whether these relatively new accounts offer the right benefits for their workers and company.

The HSA was created by Medicare legislation in December 2003 and signed into law in January 2004. It allows employees and employers to fund a tax-sheltered account to help pay current and future medical expenses. To meet IRS requirements, the account must be fully owned by the employee. It must also be paired with a High-Deductible Health Plan (HDHP). The less well-known Health Reimbursement Arrangement (or HRA) may be a better option, especially for small and medium-sized companies.

Although the HRA has been in existence since the 1970s, it was adopted in its current form June 2002. It allows employers to cover employee health care expenses in a similar way to an HSA. Employers have greater flexibility with HRAs. These plans require that the employer promises to put aside a set amount for employee health care expenses. The employer retains full control over the funds, unlike an HSA. These plans are also different from HSAs because they don’t need to be established in conjunction with an HDHP. They can also have a prescription drug rider. If employers are looking to encourage employees to be more responsible for their health care spending, they should consider setting up a Health Rembursement Arrangement. We are seeing that HRAs are being used by 15 to 20% of our clients, and this number is growing.

These plans are becoming more popular because they are easy for employers to manage and implement. They also allow the employer to control the funds. Some employers who had previously set up HSAs are now switching to HRAs. Let’s look at why:

There is no free money. An HRA, unlike an HSA that requires the employer to deposit money in an employee-owned account, doesn’t get funded until an employee makes a claim. If the employer agrees that each employee will receive an HSA, the money is transferred to a portable account which the employee can use or keep, even after the employee leaves the company. An HRA is an agreement by an employer to cover unreimbursed medical expenses. However, the employee will not actually be required to pay the money until the claim is made. The employer keeps the money until it is used and it doesn’t automatically go to employees when they leave (unless the employer has set it up this way).

Employer control An HSA gives the employee the right to all money in the account. The money can be carried over from one year to the next and employees can use it as a savings account. The money can be used to pay for any purpose they wish once they have left the company. Non-qualified use of funds is subject to a 10% penalty. An HRA allows the employer to control how much money is carried over each year and whether employees have the right to spend the remaining funds when they leave the company. For example, some companies allow employees to spend the money after they retire, and to pay for medical expenses. This is not a requirement. Others offer different vesting schedules which dictate how much money employees may use to leave.

Flexible medical plans The IRS requires HSAs to be paired with certain types of health benefits plans. The current requirement is that the HSA must have a $1050 per person and $2100 per family deductible. These deductibles must be met before any medical benefits other than preventive care can be paid by the medical plan. This applies to prescription drug benefits.

The IRS doesn’t require HRAs to be accompanied by any type of health plan. The employer can decide. HRAs can be used with managed care plans and Preferred Provider Organizations (PPO). An employer may choose to include an HRA in a higher-deductible plan. This encourages employees take greater control of their health care spending. This arrangement may encourage employees to search for the best-priced option for a test, even if they only have a small amount of money. The employer can also decide which services an employee can use the funds for, provided that they follow IRS guidelines. A HRA can be linked to a Flexible Spending account, which is an account that employees fund with pre-tax dollars. This account covers additional medical expenses.

Can HRAs help companies save money? It all depends on what type of health plan you have. These plans can save employers money in the long-term because employees are more responsible for their health care decisions. This encourages employees make wise financial decisions regarding their health care. This will encourage employees to take more control of their money and change behavior.

HRAs can save employers money in the short-term by allowing higher deductible options for health insurance. It all depends on how much money employees spend and how much employer contributions to an HRA. Employers should carefully review these plans to determine the health needs of their employees. They also need to be aware of ongoing conditions that could cause an increase in costs.

Both HSAs and HRAs give consumers more control over their health care costs. Employers should consider how they can help.