Due to the rising cost of health care, employers are choosing health plans that are more consumer-driven and designed to get employees involved in healthcare purchases.

Whether you are looking to hire new employees or retain exceptional ones, it is essential to offer an attractive and comprehensive health care package. Understanding the differences between the various types of plans available will help you choose the best one for your team.

HSA, and FSA plan benefits allow participants to pay for their out-of-pocket medical expenses on a tax-free basis. HRA plans allow for employers to contribute funds that will pay for specific eligible expenses for their employees.  

About Consumer-Driven Health Plans (CDHP)

HRAs, HSAs, and Health FSAs are CDHPs.  Rather than cover health costs upfront, this type of plan reimburses employees for qualified medical and dental expenses. These plans differ in many ways, such as who owns the account – the employee, or the employer. Other differences include:

• Who funds the account

• Annual contribution limits

• What expenses are eligible

• Whether unused funds roll over from year to year

The medical expenses an individual may request reimbursement for must qualify as federal income tax deductions, regardless of whether they exceed IRS minimums of 7.5 percent of the taxpayer’s AGI (adjusted gross income) applied to those deductions.

The 3 Different Types of Consumer-Driven Healthcare Plans

Understanding the differences between the types of CDHPs will give you a better idea of which one is right for your company and employees. Take a moment to review this information to ensure that you make the right decision.

What is a Health Savings Account (HSA)?

An HSA is a participant-owned bank account used for eligible medical expenses. The employer chooses the HSA provider. Both participants and employers can pay into the program according to annual limits set by the IRS. However, employers rarely contribute to HSA accounts. 

These plans use strict rules for both eligibility and contributions because of their tax-favored status. For plan contributions, participants must meet the following requirements:

• Covered by a high deductible health plan (HDHP).

• Not claimed as a dependent on someone's tax return

• Not covered by any PPO plan, including Medicare

Individuals can rollover funds from year to year. Since the HSA is a tax-exempt account owned by an employee, enrollees may keep the account if employment ends or the participant retires.

What is a Health Flexible Spending Account (FSA)?

A health FSA is a spending account that is exempt from income tax. However, the Affordable Care Act (ACA) limits the amount an employee can contribute to an FSA each year. The limit for 2020 and 2021 is currently $2,750.

There are three types of FSAs available – a healthcare FSA, a limited purpose FSA, and a dependent-care FSA. However, the dependent-care FSA is not a health FSA. It is known as a Dependent Care Assistance Plan (DCAP). Here is a breakdown for each of these plans:

• Healthcare FSAs: This plan is for eligible medical costs not covered by the participant’s health, dental or vision plan.

• Limited purpose FSAs: This plan covers eligible dental and vision expenses as long as the participant remains enrolled in an HDHP.

• Dependent-care FSAs: This plan is designed to cover eligible dependent care expenses and offers coverage for children twelve and under, or those permanently disabled.

What is a Health Reimbursement Arrangement (HRA)?

An HRA is an employer-owned account with a fund of money contributed by the employer. They are available only to employees who have health care coverage offered by an employer. HRAs allow employees to use these funds to pay for, or be reimbursed for, the cost of eligible healthcare-related expenses.

There is no limit to the amount contributed by the employer, and employees cannot contribute to this account. Because they are employer-owned, self-employed individuals are not eligible for HRA programs for tax-related benefits.

Factors to Consider When Choosing a CDHP

According to a survey conducted by the nonprofit Business Group on Health (BGH), large employers are budgeting for a healthcare cost increase of 5.3 percent in 2021. To stay competitive when it comes to hiring and retaining quality employees and keep employee costs down, you may want to provide one of the three types of CDHP. This option will decrease overall health care costs for your company.

The main factors to consider when choosing a benefits plan for your employees:

• Plan costs: Keep in mind the plan costs, who will fund the account, and whether there is a contribution limit. Also, consider whether your choice financially burdens employees.

• Coverage: When choosing a plan, it is crucial to understand what is covered. Consider the details of each one carefully, including what conditions are covered and when certain conditions do not apply for reimbursement. Familiarize yourself with all the restrictions that may apply.

• Your competitors: Find out what your competition offers in a healthcare plan to help you understand what your employees or potential employees might expect. If you can't match your competitors' health plans, you can offer alternative incentives that will appeal to your team.

Discover What HRA, HSA, and FSA Plans Have to Offer Your Employees

Including a consumer-driven health plan in your comprehensive benefits package requires careful assessment of the advantages and disadvantages of HSAs, FSAs, and HRAs. There is no single solution that works for every employer.

If your company is considering implementing a consumer-driven health plan, let the experienced advisors at Benefit Concepts, Inc. help you understand the right plan for your organization. They will assist you in choosing a plan that satisfies the needs of your company and employees.

Is your small business ready to provide the very best in an employee benefits package? Reach out to one of our professional advisors to help you design the perfect plan for your team.

NOTE: This content is not intended to be taken as legal, benefits, or HR advice. Since regulations change over time and can vary by location and employer size, consult a licensed broker or HR certified expert for specific guidance.