How to make sense of tax-free financial accounts for your health benefits

Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs) are three of a number of tax-advantaged financial accounts that employers can make available to employees looking for health benefit options in what can be a confusing marketplace.

“To pay for their medical expenses, employees have a number of tax-free options that they can explore,” said Ryan C. Wasileski, director of Ancillary & Specialty Product Administration for UPMC Health Plan. “The differences between them often are the kinds of insurance plans they work with, who owns the account, who controls the account and who can put money into it.”

Smart Business spoke with Wasileski about HSAs, HRAs and FSAs, and how they can make sense for employers and employees.

What exactly is an HSA?

An HSA is similar to a 401(k) retirement account, except that the money goes for medical expenses. HSAs, only available through HSA-compatible insurance plans, combine a high-deductible health insurance plan with a tax-advantaged savings account.

Employees own the account and money can be deducted from their paycheck, pretax, and deposited into their HSA. Employee contributions, interest earned and dollars spent on qualified health care expenses are all tax-free. Employers may contribute to HSAs, and employees also can invest, once they reach a certain level of savings.

HSAs do not limit when money has to be used by, therefore employees have the freedom to build their balance up for future medical expenses, invest in a variety of mutual funds or use for current out-of-pocket medical expenses. Employees who leave their job can keep their HSA.

What is an FSA?

With an FSA, the employer sets up the account and owns it, but employees get to decide the qualified medical expenses they choose to pay for. It’s considered ‘flexible’ because of its compatibility to be offered with just about any employer-sponsored health plan.

Similar to HSAs, employees and employers can make tax-free contributions to the account. FSA money cannot be invested, however, and must generally be used before the end of the plan year.

The IRS guidance issued in 2013 began allowing Health FSAs to carry over unused balances of up to $500 remaining at the end of a plan year, to be used for qualified medical expenses incurred in subsequent plan years. Carryovers are optional and make a good alternative to the grace period.

Employees who leave their employer generally lose their FSA coverage.

How do HRAs differ from HSAs and FSAs?

A HRA is a benefit that is set up by the employer for employees or retirees. It is a fund that pays for medical expenses that are not covered by a health plan. These could include deductibles, coinsurance or both.

The employer owns the HRA fund and can decide which expenses will be covered. For the employer, any money that is given to an employee for use as a medical expense is tax deductible. In addition, employees do not need to pay taxes on money received from an HRA if used for qualified medical expenses. The employer has the option to allow a rollover of HRA funds from plan year to plan year.

What do employers like about FSAs, HSAs and HRAs?

Many employers are attracted to high-deductible plans combined with account-based plans because it gives the employee more control of their health care by having them assume a more active role. They have a financial stake in lowering their costs.

The term consumer-driven health plan often describes the increased responsibility of employees or consumers. Increased financial responsibility increases consumer awareness and market competition, and ultimately leads to greater health care quality and availability to lower costs.

A well-designed consumer-driven health care plan will include a high-deductible health plan, account-based plan and wellness and disease management programs. Studies show consumers in these plans have increased consumption of preventive care services, healthy behaviors, care engagement and lower cost than other types of plans — even for patients who are high users with chronic medical conditions.

Insights Health Care is brought to you by UPMC Health Plan