Comparing HSA, FSA, COBRA AND HRA Plans

Flexible Spending Arrangements (FSA)

An FSA is an employer-sponsored and employer-owned benefit that allows employee participants are reimbursed for certain expenses with amounts deducted from their salaries, pre-tax. An FSA can include both the Health FSA that reimburses uncovered medical expenses and the Dependent Care FSA that reimburses for dependent expenses, like daycare and child care.

Pros:

• Benefits can be funded entirely from employee salary reductions (ER contributions are an option)
• Participants have access to full annual elections on day one of the interests (Health FSA only)
• Participants save on taxes by reducing their taxable income. Also, employers save by paying less in payroll taxes like FICA and FUTA
• An FSA allows participants to “give themselves a raise” by reducing the taxes on healthcare expenses they would have had anyway

Cons:

• Should an employee quit or leave the program before fully funding their FSA election, you run the risk of losing money.
• Employees risk losing money if their healthcare expenses total less than their vote (the infamous use-it-or-lose-it – though there are ways to mitigate this problem, such as the $500 rollover option)
• FSA elections are irrevocable after open enrollment. Therefore, only a qualifying change of status event permits a change of election mid-year
• Only so much can be elected for an FSA. For 2020, Health FSAs capped at $2,750 Dependent Care Accounts are, generally, capped at $5,000,
• FSA plans typically offered under a cafeteria plan and, as such, they are subject to several non-discrimination rules and tests

Health Savings Accounts (HSA)

An HSA is an employee-owned account that allows participants to set aside funds to pay for the same expenses that are eligible under a Health FSA. Also like an FSA, these accounts can be offered under a cafeteria plan, so that participants may fund their accounts through pre-tax salary reductions.

Pros:

• HSAs are “triple-tax advantaged.” Because of this, the contributions are tax-free, the funds are not taxed if paid for eligible expenses, and any gains on the funds (interest, dividends) are also tax-free.
• HSAs are portable, employee-owned, interest-bearing bank accounts; the account remains with the employees even if they leave the company.
• Certain HSAs allow participants to invest a portion of the balance into mutual funds. Any earnings on these investments are non-taxable.
• Upon retiring, participants can use any remaining HSA funds to pay for any expense without a tax penalty (though ordinary taxes required for non-qualified fees). Not only that, but retirees can use the funds tax-free to pay premiums on any supplemental Medicare coverage. This feature allows HSAs to operate as secondary retirement funds.
• There is no use-it-or-lose-it with HSAs; all funds employees contribute to their accounts and remain theirs in perpetuity. Also, participants may alter their deduction amounts at any time.
• Like FSAs, employers can allow the HSA to be entirely employee-funded, or they may choose to make contributions to their employees’ HSA accounts.
• Even though they are offered under a cafeteria plan, HSAs do not carry the same non-discrimination requirements as an FSA. Moreover, there is less administrative burden for the employer as the employees take the liability for their accounts.

Cons:

• Eligibility requires an employee that is covered by a qualifying high deductible health plan. Moreover, they cannot have coverage by any other health coverage (a spouse’s health insurance, an FSA (unless limited), or otherwise).
• Participants are limited to reimburse what they have contributed—there is no “front-loading” like with an FSA.
• Participant contributions to an HSA also have an annual limit. For 2020, that limit is $3,550 for an employee with single coverage and $7,100  for an employee with family coverage (participants over 55 can add $1,000. Also, remember there is no total account limit).
• Participation in an HSA precludes participation in any other benefit that provides health coverage. Meaning, that employees with an HSA cannot participate in either an FSA or an HRA.
• Employers can work around this by offering, a particular limited FSA or HRA that only reimburses dental and vision benefits, meets specific deductible requirements, or both.
• HSAs as bank accounts for legal purposes, so they are subject to many of the same laws that govern bank accounts, like the Patriot Act. Participants are often required to verify their identity to open an HSA, an administrative burden that does not apply to either an FSA or an HRA.

Health Reimbursement Arrangements (HRA)

An HRA is an employer-owned and employer-sponsored account that, unlike FSAs and HSAs, is entirely funded with employer monies. Employers can think of these accounts as the supplemental health plans that they create for their employees.

Pros:

• HRAs are extremely flexible in terms of design and function. Employers can essentially create the benefit to reimburse the specific expenses at a particular time and under particular conditions that the employers want.
• HRAs can be an excellent way to “soften the blow” of an increase in high medical insurance costs—employers can use an HRA to mitigate an increase in premiums, deductibles, or other out-of-pocket expenses.
• HRAs can be simpler to administer than an FSA or even an HSA, provided that the plan design is simple and efficient: there are no payroll deductions to track, usually fewer reimbursements to process, and no individual participant elections to manage.
• Small employers may qualify for a particular type of HRA, a Qualified Small Employer HRA (or QSEHRA), that even allows participants to reimbursement for their insurance premiums (special regulations apply).
• Funds can remain with the employer if someone terminates employment and has not submitted for payment.

Cons:

• HRAs are entirely employer-funded. No employee funds or salary reductions may help pay for the benefit. Some employers may not have the funding to operate such a benefit.
• Subject to the Affordable Care Act. As such, they must be “integrated” with primary medical coverage if they provide any health expense reimbursement and are also subject to several regulations.
• HRAs are also subject to many of the same non-discrimination requirements as the Health FSA.
• HRAs often go under-utilized; employers may pay several administrative costs that are disproportionate to how much employees use the benefits.
• Employers can often get “stuck in the weeds” with an overly complicated HRA plan design. Such designs create frustration on the part of the participants, the benefits administrator, and the employer.

Employee Benefits: Design or TPA Assistance

At B3PA, the third-party benefits administrator division of HR Service, we are eager to help you navigate through this confusion. With 20+ years’ experience in administering FSA, HSA, HRA, LFSA, Commuter, and transit benefits, we have the expertise to help you design the program that works best for you at b3pa.com.

Author: Ken Spencer, President & CEO