What is a Flexible Spending Account (FSA)?

A Flexible Spending Account (FSA) is an employer-sponsored group plan that can produce tax savings in the treatment of qualified expenses of employees and/or their eligible dependents. Most FSAs have a maximum annual contribution amount because of the risk involved to the plan sponsor. FSAs have been in use for several years with proven success. They are consumer driven in that they allow the employee to decide the items for which they want reimbursement as long as the item is a qualified medical expense as defined under IRC 213(d). This means that the employee can be reimbursed for any out-of-pocket expenses due to health plan deductibles, coinsurance and/or co-pays, as well as some items usually not eligible under a traditional health plan, such as many over-the-counter medications.

From an employer perspective, by implementing a FSA, employers can decrease benefits in the adjoining health plan, resulting in lower claims costs and overall plan savings. Additionally, it bears reiterating that the major advantage of the FSA is the tax break. Employers receive a considerable tax break on reduced taxable employee income. To maximize savings, an employer needs to promote employee participation. The best way to encourage enrollment is through a comprehensive employee education campaign.

Keep in mind that there are two other important things to keep in mind regarding FSAs – the “use it or lose it” rule and irrevocability of elections. The “use it or lose it” rule states that any money left in the account at the end of the plan year will revert to the employer. Irrevocability of elections is just as it states; the employee may not change their annual election at any time during the year unless due to certain changes in status permissible under IRC 125 and approved by the plan administrator.

The simple implementation of a FSA may be the answer to your clients' initiatives in their cost containment and consumer driven health care strategy. HealthNow Administrative Services (HNAS) recommends, and can help your client prepare, a comprehensive employee educational campaign to aid in their FSA success.  

What is a Health Reimbursement Account (HRA)?

Similar in some aspects to a Flexible Spending Account (FSA), a Health Reimbursement Account (HRA) allows an employer to set aside funds to reimburse employees for qualified medical expenses. Employee contributions are not permitted. Like an insurance plan, employers may deduct the cost of the HRA plan as a business expense under Internal Revenue Code 162.

HRAs are available to companies of any size and with any benefit plan design. First, the employer establishes the Plan and funds an initial amount. Thereafter, the employer may make regular deposits (usually monthly) of an established amount into each account. When covered expenses are incurred, the employer's health plan makes its determination and the participant may submit the out-of-pocket amount for reimbursement, thus providing the participant with "first dollar" coverage.

Like a FSA, a Plan Document must be established, including a description of covered expenses. The HRA plan may be limited to the group's out-of-pocket expense or may be so broad as to cover any expense qualified under IRS code 213(d). The latter requires savvy use of the HRA since money spent on expenses not covered by the medical plan will have been spent when covered expenses are later applied to a high deductible. For example, an employee who used the entire benefit for Lasik eye surgery early in a plan year will not have funds available later when significant covered expenses, such as an inpatient hospitalization, are applied to the medical plan's deductible and coinsurance. If an employee uses HRA dollars prudently, funds will be available to reimburse the plan's out-of-pocket expenses or may be carried over into the next plan year.

An HRA can be a significant introduction to consumer driven health care. It requires the participant to choose services wisely and measure not only the medical, but also the financial, implications of a physician office visit versus an emergency room visit or a costly brand-name drug versus the less expensive generic alternative. The account empowers the employee to directly benefit from well-informed consumerism. Such thoughtful health care decisions should eventually have a positive impact on overall utilization of the employer's health plan.

Since an HRA is not portable and because there is no "use it or lose it" rule, some observers believe HRAs help employers hold on to prized employees. It is important to note that once a participant is no longer employed, they may continue using previously unused funds through COBRA.

HealthNow Administrative Services (HNAS) can establish and administer an HRA program that can partner with your client's current health plan design. In addition, we can assist you in creating a brand new partially self-funded health plan for your client, which would optimally wrap-around an HRA, for a comprehensive benefit package. We provide considerable flexibility with regard to plan design, a large stop-loss carrier base, and excellent administrative support and service team. By creating a defined funding strategy, promoting consumer responsibility, and increasing employee retention, HNAS believes that the HRA approach may meet some of your clients' health care benefit objectives.

What is a Health Savings Account (HSA)?