In the past four years, changes in legislation have authorized the establishment of
new savings alternatives for health care: health savings accounts (HSAs) and health
reimbursement arrangements (HRAs).
“According to a census done by the
American Health Insurance Plans, the number of smaller employers — those with 50
employees or less — who offer HSAs or
HRAs is growing fast, rising from approximately 25 percent in 2007 to 30 percent in
2008,” says Nancy Pokorny, vice president of
business development at the Council of
Smaller Enterprises (COSE).
Smart Business spoke with Pokorny about
HSAs and HRAs, how they work and how
they compare to each other.
Who is eligible for HSAs and HRAs?
An individual covered by a qualified high-deductible health plan (HDHP), who is not
covered by any other health insurance that is
not an HDHP, is not enrolled in Medicare and
is not claimed as a dependent by another
individual is eligible for an HSA.
Current or former employees (retirees but
not self-employed individuals), their spouses
and dependents, and the spouses and
dependents of deceased employees who
meet the employer’s health benefits eligibility
criteria and, in most circumstances, are not
enrolled in an HSA are eligible for an HRA.
Who owns the account and who can make
contributions?
For an HSA, the employee owns the
account. The employee or employer can contribute funds to the account. In 2008, the
maximum contribution is $2,900 for individuals and $5,800 for families per calendar year
(in 2009, the maximum contribution will be
$3,000 for individuals and $5,950 for families)
and is prorated the first year by the effective
date of the health plan. Individuals age 55 and
older may contribute more.
For an HRA, the employer owns the
account and is the only one who can make
contributions to the account. These contributions are not included in the employee’s
income. An HRA is not a true account but an
agreement by an employer to pay a portion of
qualified medical expenses up to a stated amount. Contributions are not limited. HRAs
may be offered with other health plans,
including flexible spending arrangements.
What are the minimum deductibles and maximum out-of-pocket amounts?
For an HSA, in 2008, the minimum
deductible is $1,100 for individuals and
$2,200 for families (in 2009, the minimum
deductible will be $1,150 for individuals and
$2,300 for families). In 2008, the maximum
annual out-of-pocket is $5,600 for individuals
and $11,200 for families (in 2009, the maximum out-of-pocket will be $5,800 for individuals and $11,600 for families). There are no
requirements for an HRA.
What is the tax treatment?
In an HSA, contributions are 100 percent
tax deductible. Funds spent on qualified
medical expenses are tax-free for life. At age
65, funds used to supplement income are tax-deferred. Funds used to cover nonqualified expenses (prior to age 65) will be taxed and
subject to a 10 percent penalty by the IRS.
In an HRA, coverage and reimbursements
of qualified medical care expenses generally
are excluded from the employee’s gross
income. If any distribution is, or can be, made
for nonqualified expenses, all distributions
(including reimbursements for qualified
medical expenses) made in the current tax
year are included in gross income.
Is the account portable?
For an HSA, employees may use the
account after they leave the employer who
offered the HDHP (even if their new employer does not offer a HDHP), they retire or have
no other medical coverage.
For an HRA, the funds may not be rolled
over into another employer’s account. But,
employers can design HRA plans to allow
retired or terminated employees to use any
remaining funds to pay medical expenses.
Also, HRAs are subject to COBRA continuation requirements.
What happens to unused funds?
In an HSA, unused funds may be carried
over into future years with no limits. Most
HRA funds reset at the start of each year,
although some employers may choose to
rollover unused funds from year to year. The
employer may not refund any part of the
remaining balance in an HRA to participants.
How does an employer know if an HSA or
HRA is the right option?
In general, HSAs are a good option for
financially savvy individuals, individuals who
are relatively healthy, and for those who are
approaching early retirement but are still several years away from Medicare coverage.
HRAs, comparatively, provide employers
control and flexibility.
NANCY POKORNY is the vice president of business development at the Council of Smaller Enterprises (COSE), one of Ohio’s largest
small business support organizations. Reach her at [email protected] or (216) 592-2309. Composed of more than 17,000 members,
COSE strives to help small businesses grow and maintain their independence. COSE has a long history of fighting for the rights of all
small business owners, whether it’s through group purchasing programs for health care powered by Medical Mutual of Ohio, workers’
compensation or energy, advocating for specific changes in legislation or regulation, or providing a forum and resource for small businesses to connect with and learn from one another.
