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@example.com 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.