As an employer, finding a way to attract and retain employees in this new decade of fancy perks can not only be daunting but expensive. It has never been more imperative to sit down and look at your benefits plan as a strategy to benefit your bottomline. Some great things to add to your benefits plan are savings accounts that will allow your employees to grow and prosper professionally and personally.
Today, we will take a close look at three types of savings accounts: Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Accounts (HRAs). For each, we will discuss whether or not they may be a good fit for your business, as well as how they can each play with and against each other.
Health Savings Accounts (HSAs)
An HSA is a savings accounts that gives your employees the ability to set aside money on a pre-tax basis to pay for qualified medical expenses. This, in turn, can help lower their overall healthcare costs, making HSAs a valuable offering in your benefits plan. Tom Williams, an Account Executive at JA Benefits dedicated to partnering with businesses to support both strategic and day-to-day service needs, noted, “While HSAs are designed for employees to use to pay for qualified healthcare expenses, I always recommend that people take advantage of the fact that they’re a tax-friendly investment vehicle and can act as a powerful retirement-savings tool if you let your balance compound over the years.”
HOW TO USE IT?
Employees can only contribute to an HSA if they have a High Deductible Health Plan or HDHP. This is typically a health plan that covers preventive services before a deductible. In 2020, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family. HDHPs that are HSA eligible will allow employees to contribute up to $3,500 for self-only coverage and up to $7,100 for family coverage. A great benefit of an HSA is it allows your funds to roll over year to year if an employee doesn’t fully spend what exists in the account. Plus, an HSA can earn interest and other earnings, which are not taxable. Combining a HDHP with an HSA gives your employees the advantage of paying deductibles, as well as other qualified medical expenses.
HOW DOES IT REDUCE MY COSTS?
With a HDHP, you need to take into account the amount of healthcare services your employees need. If there is a low number needed, then your HDHP can offer lower monthly premiums. However, the more healthcare services your employees need, the better off you will be offering a HDHP plan with HSAs. This will allow your employees to save more on healthcare services, because they will have access to tax-free money in their HSAs.
As an employer, there are two main ways you can make taxfree contributions to your employees’ HSAs – with or without a Section 125 plan. This plan is part of the IRS tax code that allows your employees to convert a taxable benefit, like their salaries, into non-taxable benefits. In other terms, your employees would be allowed to be paid with benefits, such as health insurance premiums, on a pre-tax basis.
Many employers will use a Section 125 plan to offer matching contributions to their employees, which in turn can save them 7.65% on payroll taxes for all employee contributions.
If you decide to take the route of no Section 125 plan, then any tax free contributions you make must be comparable for all employees participating. Comparable contributions, as defined by the IRS comparability rules, are contributions of the same dollar amount or percentage of an employee’s deductible for all employees with the same category of coverage.
It’s crucial to note that HSA contributions are not subject to the comparability rules when used in conjunction with a Section 125 plan. However, nondiscrimination rules will still apply, which restrict you from making excessive contributions in favor of highly compensated employees.
WHAT TAX BENEFITS DO MY EMPLOYEES RECEIVE?
Because HSAs are tax advantaged accounts, they allow both you and your employees to contribute to the account. As we mentioned previously, this gives your employees the benefit of paying for medical expenses and save for their futures. However, possibly the greatest benefit of utilizing HSAs as part of your offered HDHP is your employees will receive a triple tax advantage. Basically, this means (a) the funds contributed to an HSA are on a pre-tax basis, (b) the funds can be invested and grow tax free, and (c) the funds taken out to use on any qualified medical expenses are also tax free. These tax advantages enable HSAs to be a fantastic solution to the rising healthcare expenses in retirement.
Flexible Savings Accounts (FSAs)
An FSA is a savings account that provides your employees with specific tax advantages, allowing your employees to contribute a portion of their regular earnings to pay for qualified expenses related to medical and dental costs. The funds contributed to a FSA are deducted from your employees’ earnings prior to being made subject to payroll taxes. Unlike an HSA, the money that exists in an employee’s FSA account must be used by the end of a plan year.
However, as their employers, you have the ability to offer a small grace period of up to 2.5 months, or until March 15th of the following year. As an employer, if you choose to not allow for the grace period of 2.5 months, you can allow your employees to carry over $500 per year of unused funds from their accounts. Keep in mind, however, that you can only offer one of these options.
WHAT ARE THE KEY BENEFITS?
Because the funds contributed to an FSA are deducted from an employee’s earnings before taxes, their overall taxable income is lowered. This means, throughout the year, any significant contributions made to an FSA will lower an employee’s annual tax liability. An employee’s tax liability, to put simply, is the total amount of tax debt owed by your employee. Utilizing an FSA keeps tax debt low and, therefore, employees happier.
It’s important to note a FSAs limitations. The IRS limits just how much an employee can actually contribute annually. For medical FSA accounts in 2020, an employees limit is $2,750, $50 higher than 2019. Married individuals can separately put aside this limit through their separate employers. While employers must contribute to an HSA, you do not have to make contribution to an FSA. If you do decide to contribute, you should be sure to educate your employees on the fact that your contributions will not count toward their limit.
HOW TO USE IT?
The key to utilizing an FSA correctly is for your employees to have a willingness to carefully look over their current and future medical expenses to see just how much they plan on spending. FSAs do not offer a ton of flexibility with an employees funds. So, auditing your employees’ abilities to understand their healthcare expenses is crucial.
That said, when you choose to use an FSA, that doesn’t mean you can no longer offer HSAs. In fact, you can combine your HDHP and HAS benefits with both Limited FSAs and Combination FSAs. A Limited FSA covers dental, vision and preventive care expenses. A Combination FSA coversthe same expenses, but once the IRS deductible is met, it converts into a full Medical FSA and remains eligible to be paired with an HDHP and HSA.
By offering both an HSA and a FSA, you give your employees the ability to actually use their HSAs as a savings vehicle, while they can use their FSA – which earns zero interest and cannot be carried over year to year – for immediate medical expenses. Adding an FSA to your benefits plan is a way to truly harness the long-term power of an HSA.
Health Reimbursement Accounts (HRAs)
An HRA is an IRS-approved, tax advantaged health benefit that allows your employees to be reimbursed for their out-of-pocket medical expenses and personal health insurance premiums. No matter which type of HRA you choose to offer to your employees, all of them give you the ability to choose a monthly or annual amount with which to reimburse an employee for medical expenses. HRAs are completely tax free for you and, depending on the type of HRA and individual employee circumstances, for your employees.
WHAT HRAS ARE AVAILABLE IN 2020?
Each available HRA will vary by eligible expenses and participation requirements. In 2020, the available HRAs include the QSEHRA, the ICHRA, the one-person stand-alone HRA, and the retiree HRA.
THE QSEHRA
The QSEHRA or the Qualified Small Employer HRA is available to businesses with fewer than 50 employees that are not currently offering a group health insurance policy. In 2019 a QSEHRA allows businesses to offer up to $5,150 for single employees and $10,450 for employees with a family. Employees can be reimbursed for their own individual health insurance premiums as well as certain out- of-pocket medical expenses. Allowance amounts must be the same among all employees with some differences allowed according to the employees’ age and family size. The employer can make the HRA available to all employees or only full-time employees.
THE ICHRA
Like the QSEHRA, the individual-coverage HRA (ICHRA) allows employees to be reimbursed for individual health insurance premiums as well as certain out-of-pocket medical expenses. The differences are that businesses of any size can participate in the ICHRA, employers can offer a group plan at the same time, and there are no caps on the annual allowance. Employers can also create employee classes based on job criteria and offer different allowances accordingly. Employees and their families are only eligible for the ICHRA if they have coverage under an individual health insurance policy. If the employee or a participating family member ever loses individual coverage, they can no longer receive reimbursements. We expect the ICHRA to be available beginning 2020.
THE ONE-PERSON STAND-ALONE HRA
The one-person stand-alone HRA is available to businesses of all sizes that wish to offer an HRA to just one employee. It can be used to reimburse out of pocket medical expenses as defined in IRC 213(d). It has no allowance caps or group health insurance requirements. Annual rollover is permitted.
THE RETIREE HRA
The retiree HRA is only available to a business’s retired employees. Like the one-person stand-alone HRA, businesses of all sizes can offer it, it has no allowance caps or group health insurance requirements, and annual rollover is permitted.
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There are also a couple other types of HRAs you may want to know:
GHP-HRA
This HRA must be integrated with your group health plan, as well as meet some specific requirements which an advisor can help you with.
AS OF 2020, THE EXCEPTED BENEFIT HRA OR EBHRA
This HRA can offer a limited benefit for medical expenses of $1,800 per year.
There is also an HRA that only pays excepted benefits, such as limited-scope dental and vision coverage.
IS AN HRA RIGHT FOR MY BUSINESS?
An HRA is a great option for small businesses. Tom reassured, “I have helped many large businesses utilize an HRA, too. Pairing an HRA with their group health plan is one of many options on the path to purchasing continuum that large employers can utilize to help them reach their individualized goals with their long-term benefit strategy.” Small, mid-sized, or large, an HRA will give you a competitive advantage to your benefits plan, allowing you to make your benefits offerings personalized to your employees’ needs and eliminating the costs of a traditional group insurance plan. Many employers find that offering HRAs helps to retain and recruit quality employees.
But, just like any other benefit, you should consider its negatives. Possibly the greatest con, from an employee’s viewpoint, is that an HRA is owned and funded by you, as the employer. If they were to leave the company, their HRA would not follow them. This also means, because you are the one to own and fund the HRAs, you will need to be ready to set time aside each month to administer the plans. That said, if you’re looking to establish better retention and have a few extra minutes every month, HRAs can be a great asset to your company.
If you want to offer an HRA along side HSAs, the IRS allows for you to pair limited-purpose HRAs, post-deductible HRAs, suspended HRAs, and retirement HRAs
LIMITED-PURPOSE HRAS
Limited-purpose HRAs allow you to reimburse your employees for expenses such as dental, vision, and preventive care costs. You can offer this limited-purpose HRA in conjunction with a group HDHP, allowing your employees the opportunity to use HSAs to save for future medical expenses.
POST-DEDUCTIBLE HRAS
Post-deductible HRAs are also compatible with HSAs. A postdeductible HRA is essentially an HRA that has its own deductible. It can be used to reimburse employees for regular medical expenses—even before they’ve met their full HDHP deductible—but only after they’ve paid at least the minimum allowable HDHP deductible amount.
SUSPENDED HRAS
Suspended HRAs are another option for employees who have HDHP coverage and want to make HSA contributions. Before the HRA coverage period begins, the employee elects to suspend access to HRA reimbursements, which allows them to remain HSA-eligible. Employees with suspended HRAs can still receive reimbursements for expenses such as dental, vision, and preventive care costs, just as they could from a limitedpurpose HRA.
RETIREMENT HRAS
With a retirement HRA, you can continue to contribute money to an employee’s HRA (and the balance can be invested and grow over time), but the money is not available until the employee retires. The HRA can only reimburse post-retirement medical expenses. Since the HRA funds aren’t available for withdrawal pre-retirement, the employee can still contribute to an HSA at the same time as long as they have HDHP coverage.
Note that these restrictions don’t apply if an employee has funds in an HSA but isn’t currently contributing to it. Those with HSAs can withdraw funds from their HSA and receive HRA reimbursements in the same year. But as is always the case when it comes to tax-advantaged accounts, there’s no double-dipping allowed: you can’t pull tax-free money out of an HSA and also seek a tax-free HRA reimbursement for the same medical expense. This is the same when an HRA is used in conjunction with an FSA.
Making Great Benefits Moves with JA
We get it: all the information you’ve consumed on different benefits options is overwhelming. That’s why we’ve made it our priority tosit with you and make designing a great benefits plan a sweat-free incident. Whether and HSA, FSA, or HRA is right for your business isn’t adecision you should make without the help of an expert.
Since 1988, JA has delivered difference to the field of Employee Benefits through truly innovative solutions accompanied by vision, clarity and guidance. Our company is built on a foundation of focused and talented experts. This core strength allows us to deliver an unsurpassed experience for our clients. Through our firm commitment to creating meaningful outcomes, we help you understand and experience the difference in having a true benefits partner.
We invite you to experience a true partner for your employee benefits and join us for the Journey Ahead. Contact us at (800)663-5960 or visit our website, www.jabenefits.com, for further information on our services.
Sources:
HealthEquity. “Often Overlooked Tax Benefits of HSAs for Employers.” Often Overlooked Tax
Benefits of HSAs for Employers, blog.healthequity.com/often-overlooked-tax-benefits-of-hsasfor-employers.
“High Deductible Health Plans (HDHPs) & Health Savings Accounts (HSAs).” HealthCare.gov,
www.healthcare.gov/high-deductible-health-plan/.
Kagan, Julia. “Flexible Spending Account (FSA).” Investopedia, Investopedia, 29 Jan. 2020,
www.investopedia.com/terms/f/flexiblespendingaccount.asp.
Berkenpas, Jordan. “HRA for Dummies.” PeopleKeep, PeopleKeep, 20 Nov. 2019,
www.peoplekeep.com/blog/hra-for-dummies.
Keck, Jennifer. “Can I Have an HRA and an HSA at the Same Time?” Gusto, 1 Nov. 2019,
gusto.com/blog/health-insurance/hra-hsa-sametime#Can_you_have_an_HSA_and_an_HRA_at_the_same_time.
Use our provided resources to stay informed with updated compliance guidelines and regulations - courtesy of JA BENEFITS.
