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In the last several years, different group health insurance plans have emerged to help give employers more inexpensive options to care for their employees. Some of these benefits were designed specifically to make it easier for small businesses to offer benefits packages that include affordable coverage options.
A health reimbursement arrangement (HRA) or a health savings account (HSA) is a component of a Consumer-directed health plan (CDHP). A CDHP is designed to give employees who typically do not spend much time at the doctor’s office more control over their healthcare spending. For employers, the advantage of a CDHP is controlled healthcare spending.
CDHP Enrollment Restrictions
Because they offer unique tax advantages, CDHPs have strict guidelines administered by the IRS. Not eligible to enroll in a CDHP is anyone:
with a flexible spending arrangement (FSA)
who is a dependent for tax purposes
enrolled in Medicaid, Medicare or TRICARE
enrolled in another comprehensive medical plan
enrolled in a Voluntary Employee Beneficiary Association (VEBA) account
A CDHP provides similar healthcare coverage to traditional plans, but eligibility and cost-tracking are unique to these consumer-directed plans.
Who Benefits from CDHP?
Because of the unique qualifications of these plans, they are not right for everyone. Those who benefit most from a CDHP are:
Looking for a low monthly premium
Interested in tax savings by spending pre-tax money on healthcare
Willing to verify qualified services, supplies and medication
Able to keep track of their healthcare expenses for possible IRS audit
Not facing ongoing medical needs or costs, such as those with chronic conditions
The combination of a CDHP and HRA or HSA can be a cost-saving measure for employers. Health insurance premiums go down when switching to a high-deductible plan. Establishing an HRA in combination with a high-deductible health insurance plan can increase the savings and extend more flexible benefits to employees.
How Does HSA Compare to HRA?
HSA is an account while HRA is just a payment “arrangement.” In an HRA, the employer allocates funds for each employee to cover medical expenses, but those funds are owned by the employer until they are spent.
While they are both designated for medical expenses, HSA and HRA have different requirements and restrictions.
Funding — HRA must be funded solely by the employer, while HSA can have any combination of employer and employee funding.
Portability — HRA funds revert to the employer upon severance, but HSA funds are owned by the employee and can move with them to another employer.
Excess balance — Since an HSA is owned by the employee, the disposition of unused money at the end of the year is at the employee’s discretion. HRA funds, however, are managed by the employer who may choose to roll them over at the end of the year or not.
Plan design — While HRAs can be linked to a high-deductible health plan, HSAs must be. HSAs cannot be used to pay health plan premiums and are limited by maximum out-of-pocket expenses. HRAs have no such restrictions.
HRAs give the employer maximum flexibility and potential tax savings. Funds do not need to be allocated to a separate account. Instead, employee medical expense claims can be paid out to the general account, and those reimbursements are tax-deductible.
Getting Help with CDHP & Complimentary Plans
To learn more about HRAs and HSAs and find out about cost-effective ways to offer a rich benefits package to your employees, contact Northern Insuring. Our knowledgeable insurance employees will provide you with options for insurance coverage for you and your employees.