Health Care Accounts
Explaining the Different Between HRA’s, HSA’s, and FSA’s
When employers create a group health plan, they need to create a health spending account to manage how covered individuals receive care for current and future medical expenditures. There are three basic types of consumer-driven spending accounts: health reimbursement arrangements (HRA’s), health savings accounts (HSA’s), and healthcare flexible spending accounts (FSA’s).
These plans offer favorable benefits concerning taxes and allow each employee to have their own account under the group health plan. But, the Affordable Care Act (ACA) has changed how these types of spending accounts operate. Your consumer-driven plan might be affected by updated ACA guidelines, so we encourage users to review the Frequently Asked Questions below:
Who is eligible to participate in these plans?
- FSA: Any individual whose employer offers an FSA group health plan is eligible to participate. This also included retired individuals as long as most participants are current employees.
- HRA: Any individual whose employers offer an HRA group health plan is eligible (this includes spouses and retired individuals). Retiree-only HRA plans are not required to meet the same medical coverage standards.
- HSA: To qualify for an HSA, individuals cannot be covered by any health coverage plan except for a high-deductible health plan (HDHP). In addition, to maintain an HSA account, participants cannot receive Medicare benefits or appear as a dependent on a spouse or parent’s tax return.
Can an employer impose other eligibility requirements other than those stated above?
- FSA: So long as the eligibility guidelines are non-discriminatory, employers may require other preconditions to apply for an FSA.
- HRA: Just like an FSA, employers may apply further requirements to become eligible for their HRA accounts.
- HSA: Employers may not limit the amounts that employees contribute to an HSA. Because these accounts belong to the individual as a health savings plan, employers are also permitted to limit their own contributions to HSA accounts.
Can an employee contribute to the designated account? Can someone else contribute to the account?
- FSA: As of 2015, employees are permitted to contribute up to $2,550 by default or whatever the maximum is as specified by the plan. At the same time, another person cannot make contributions.
- HRA: No, employees cannot make contributions to an HRA account. Other individuals also cannot make contributions.
- HSA: Yes, but there are different contribution limits depending on certain criteria. For instance, the 2015 contribution limit for self-coverage is $3,350 and the limit for family coverage is $6,550. Individuals over the age of 65 can also deposit an additional $1,000 for health-related costs. Anyone can contribute to the HSA as long as they stay within these contribution limits.
Can an employer contribute to the account? If so, how much?
- FSA: Yes, an employer can contribute up to double the employee’s contribution, plus an extra $500.
- HRA: Yes, employers can make contributions to the account.
- HSA: Yes, but the employer must remain within the contribution limits.
Does the spouse’s health coverage affect the account?
- HRA: In many cases, an employer will integrate a spouse’s health plan into an HRA account, even though the employer is not required to do so.
- HSA: If an employee currently receives health coverage through their spouse’s non-HDHP, the employee is not eligible to participate in the HSA.
Does the PPACA require a formal account?
- FSA: No, these bookkeeping standards are not required.
- HRA: No, these bookkeeping standards are also not required.
- HSA: Yes, a trust account or custodial account through a bank/credit union is almost always required.
Is a Section 125 Cafeteria Plan necessary?
- FSA: Yes, this must be a part of the Section 125 Plan.
- HRA: No, an HRA account cannot be part of a Section 125.
- HSA: An HSA may, but is not required to, be part of a Section 125 Plan.
Can all health expenses be reimbursed?
- FSA: All medical expenses covered by Code 213 can be reimbursed by an FSA program (which includes dental and vision). Healthcare premiums may not be reimbursed.
- HRA: Again, all medical expenses (including dental and vision) are covered. The employer can reimburse group coverage premiums as long as they are pre-tax, but cannot provide reimbursements for individual policy premiums.
- HSA: All medical expenses are covered. Most of the time, this does not include premiums, except in the cases of long-term care insurance, COBRA, or Medicare supplements.
Can non-health expenses be reimbursed, as well?
Only HSA’s can reimburse employees for non-medical expenditures. This will also include income taxes and a 20% excise tax.
Under the policy, whose expenses can be reimbursed by the employer?
The actual employee, spouse, children under the age of 27, and any other dependents can receive reimbursements from the employer for health-related costs during the coverage period.
Can an employer set a limit on non-reimbursable expenses?
- FSA: Yes, an employee can design a “limited purpose” FSA to include only specific expense. For instance, it would be possible for the FSA to provide reimbursements for only dental and vision.
- HRA: Similar to FSA’s, an employer may also create a “limited purpose” HRA program to covered a narrower scope of reimbursements.
- HSA: In this plan, employers are not permitted to set limits on reimbursable expenses.
How are standard medical expenses reimbursed?
For both FSA’s and HRA’s the process is fairly straightforward. The coverage holder simply submits the claim to the policy administrator. On the other hand, for an HSA, the employee is expected to pay for the expense directly from the HSA account and maintain a record of the transaction on their own.
Can employees continue to receive reimbursements after being terminated?
COBRA, a federal program that allows employees to keep health coverage after employment is terminated, can be elected if the employee so chooses for both FSA’s and HRA’s. On the other hand, an employee can always continue to use an HSA after his or her employment has been terminated.
Will unused contributions in the account carry over from year to year?
Understanding how unused contributions work are a focal point of these spending accounts. For FSA’s, these do not carry over from year to year – only in very rare circumstances will this actually happen. For HSA’s, these can always transfer to the following year because the account belongs to the individual. The same applies for HRA’s as long as a carry-over policy is specified by the plan.
Can employees access funds even before they have been contributed to the account?
Only with FSA’s must an employee have access to funds prior to contribution. In fact, FSA coverage must begin the first day of the policy, regardless of contributions. For other types of health spending accounts, this policy must be specified in advance.
Can an employee participate in multiple health spending accounts?
Yes, employees have the option of participating in multiple health coverage programs as long as the other programs are “limited purpose.” Generally speaking, an HRA will pay before an FSA policy, unless otherwise noted by the coverage plan.
Is a Summary Plan Description (SPD) required? What about a 5500 tax report?
In almost all cases of FSA’s and HRA’s, an SPD is required by employers. This standard does not apply to church and government policies. For HSA’s, this is indirectly required by the pre-existing HDHP. For 5500 forms, these only need be submitted when the employer has more than 100 employees.
What other requirements must these specialized spending accounts follow?
- W-2 reporting: employer contributions are only noted on W-2 forms for HSA accounts
- PCORI fees: Most often, this applies to self-funded HRA plans (but these apply only to employees, not dependents).
- Health insurance provider fees: No, these fees do not apply to any of the related health coverage programs.
- Transitional reinsurance fee: No, these do not apply.
- Cadillac tax: Yes, in most cases, contributions to the account are applied to the Cadillac tax. This additional tax may apply to both employee and employer depending on the nature of the account (i.e. if Section 125 plan).
- HIPAA privacy: These are almost always mandated in the healthcare industry, but are not directly required by an HSA, even though they may be required by a related HDHP.
- Minimum essential coverage: Only an HRA account qualifies as minimum essential coverage.
What This Means For Employers and Employees
Does your company offer the option of an HRA, HSA, or FSA? If so, then there are hundreds of regulations that affect how you and your employer can utilize the account. Failing to understand this vast network of eligibility requirements and contribution rules can sometimes lead to severe IRS penalties or even decreased health coverage. To understand how you, your family, and your business can understand the basics of FSA, HSA, and HRA compliance, call the health insurance experts at Providence Insurance Group.