Tax Favored Health Plans
Differences Between FSA, HSA, HRA
and other Health Savings Accounts
Flex-Pay Payroll Services * 723 Coliseum Drive, Suite 200 *
Winston-Salem, NC 27106 * info@flex-pay.com * (800) 457-2143
Why offer a tax favored health plan?
Types of Plans
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POP - Premium Only Plan
HSA - Health Savings Accounts
FSA - Flexible Spending Arrangements
HRA – Health Reimbursement Arrangements
Link to Publication 969 below:
http://www.irs.gov/pub/irs-pdf/p969.pdf
• MSA – Medical Savings Accounts (Archer MSAs
and Medicare Advantage MSAs) Handled like an
individual IRA account
Consumer Driven Health Plan
• Theoretically, employers reduce health related expenses to the
company including health insurance premiums, health related
absences, and productivity through involving the employees in the
decision making of choosing their plan and coverage.
• Each year, employees and employers are offered less coverage,
higher deductibles, higher co-payments, more plan limitations and
higher premiums from the insurance companies.
• With health savings accounts, employees can choose and pay for
health care treatment that may not be covered under the employer
provided insurance plan, improving their overall wellness.
• Health savings accounts also provide a method for the employee to
fund the future costs of the higher deductible either with their own
money or with EE and ER funds if the ER contributes.
Employee Benefits of All Plans
• Pretax deduction for employee
contributions including income,
Social Security and Medicare tax.
Reimbursements or distributions from the
accounts that are used to pay qualified
medical expenses are not taxed.
Refer to IRS Publication 502 for qualified expenses
• No taxes on interest or earnings on the
assets of the account.
Employer Benefits of All Plans
• Tax savings on employee pretax deduction
– Social Security, Medicare, FUTA, SUI.
• Employer contributions are tax free and are
considered a business expense.
• These plans provide a relatively low cost way to
offer a valuable employee benefit.
• The administrative costs and employer
contributions may possibly be recouped through
lower health insurance premiums and payroll tax
savings.
Premium Only Plan Features (POP)
• Designated deductions are pretax, typically
insurance premiums such as medical, dental,
vision, etc. and HSA employee contributions.
• Low cost and easy to establish plan.
• No monthly fees to maintain plan.
• Saves employee and employer FICA taxes
along with employer FUTA and SUI taxes.
• Requires a plan document.
Differences of Medical
Savings Accounts
Flexible Spending Account
Health Savings Account
Health Reimbursement Account
Features of HDHP’s
• Higher deductible than typical health plans.
• Minimum annual deductible: individual is $1,300, and
family is $2,600.
• Maximum on the sum of the annual deductible and out of
pocket expenses are: individual is $6,550, and family is
$13,100.
• An HDHP may provide preventive care at no or lower
deductible (annual physicals, routine pre-natal, well-child
care, screening ,etc.).
• Link to HSA limits: http://www.treasury.gov/resourcecenter/faqs/Taxes/Pages/Health-Savings-Accounts.aspx
• The amounts are subject to change every year.
Flexible Spending Arrangement
Features (FSA)
• The employer has flexibility in the plan’s design.
• An FSA allows employees to be reimbursed for
medical expenses.
• FSAs are usually funded through voluntary
salary reduction agreements (125 deductions).
• The employer may also contribute as a tax free
fringe benefit.
• Requires a plan document.
• Does not require a HDHP.
FSA Benefits/Risks
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Employee contributions are tax free.
Employer contributions are tax free.
Withdrawals for qualified medical expenses are tax free.
Employer Risk - employee can withdraw funds through
a large medical expense reimbursement in advance of
their contributions.
• Employee Risk – unspent funds are forfeited annually
(plans may have a grace period)
• Carry over option up to $500 can rollover for one plan
year to the next for FSA medical only.
FSA Plan design
• As of January 1, 2014, employers must offer a group health plan to
establish a FSA.
• No HDHP or any type of specialized insurance plan is required.
• The IRS limit on medical FSA is $2,550 as of 2016. The IRS limit is
subject to change from year to year due to cost of living
adjustments.
• IRS limit on dependent care FSA $5,000. EE can not change
election during the year unless there is a qualifying event.
FSA Types of Accounts
• Medical Expenses which typically covers deductibles, copayments,
prescription copayments and over the counter medication if the
doctor prescribed the OTC.
• Dependent Care which typically covers expenses to care for
dependents while the employee is at work. Along with day care, this
can also cover adult day care for senior citizen dependents.
• Limited Scope of expense reimbursement depending on the type of
benefits offered.
– Vision, dental, etc., but not health insurance
FSA W2 Reporting
• FSA employee or employer contributions are not
required to be reported on the W2 except
dependent care contributions in Box 10.
• The amounts can voluntarily be reported in box
14 for informational purposes.
• The employee isn’t required to report FSA
contributions on their income tax return.
Health Savings Accounts (HSA) Features
• An HSA is a tax-exempt trust or custodial
account that you set up with a qualified HSA
trustee to pay or reimburse certain medical
expenses you incur.
• A qualified trustee can be a bank, an insurance
company, or anyone already approved by the
IRS.
• Does not require a plan document.
• Began in 2003, which may indicate there will be
future IRS changes, annually indexed by IRS.
Benefits of HSA
• Contributions by employer or by employee through
cafeteria plan are excluded from income. (Exempt from
income tax only if contributions made outside of 125.)
• Contributions carry over from year to year.
• Interest earned on the account is tax free.
• Distributions are tax free if used for qualified medical
expenses. (Reference IRS Publication 502.)
• Portable – stays with employee, not employer owned.
How do Employees Qualify for HSA?
• The employee must be covered under a
High Deductible Health Plan (HDHP).
• The employee cannot be enrolled in
Medicare.
• The employee cannot be claimed as a
dependent on someone else’s tax return.
• The employee cannot have any other
health coverage other than the next slide.
HSA Other allowed coverage
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•
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•
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Specific disease or illness
Fixed amount per day of hospitalization
Accidents
Disability
Dental
Vision
Long-term care
HSA Contribution Limits
• Maximum contributions (total EE and ER):
Individual $3,350
Family
$6,750
– If the employee is 55 or older, an additional
$1,000 can be contributed.
• Additional limits apply for partial year
eligibility.
• Pub 969
HSA W2 Reporting
• Both the employee’s pretax contributions
and the employer’s contributions must be
reported in Box 12W of the employee’s
W2 form.
• This information is required to be recorded
on Form 8889 with the individual’s 1040.
Health Reimbursement
Arrangements (HRA) Features
• HRA allows employees to be reimbursed
for medical expenses.
• More flexible, does not require a HDHP.
• HRA must be funded solely be employer,
no employee contributions allowed.
• Requires a plan document.
Benefits of an HRA
• Employer contributions are tax free.
• Withdrawals for qualified medical expenses are
tax free. Reference IRS Publication 502.
• Unused amounts can be carried forward for
reimbursements in later years.
• Not as flexible as an HSA since only employers
are allowed to fund the account and employees
cannot contribute pretax dollars to the account.
• Funds cannot be invested.
HRA Plan Design
• The design options provide limitless
customization for employers.
• No IRS limit on Employer contributions.
• Funds stay with employer upon employee
termination.
HRA W2 Reporting
• HRA employer contributions are not
reported on the W2.
• The employee is not required to report
HRA contributions on their 1040 return.
Benefit Comparison
HSA
FSA
HRA
No
Yes
Yes
Yes
Yes
Yes
Yes
Optional
Optional
individual $3,350, family
$6,750, plus $1,000 if 55+
Yes
Optional
Optional
$2,550 limit on medical and $5,000
for dependent care
Yes
Required
No
Employee tax savings
Contributions are tax free
Contributions are tax free
Claim reimbursements are tax free
Employer tax savings
Employment taxes, business
expense
Employment taxes, business
expense
Business expense
Not taxed
Not taxed
Not taxed
Account prefunded by employer
No
No for Dependent Care
Yes for Medical
No
Roll unused dollars to next year
Debit Card
Yes
Yes
Yes
Yes
Yes
Yes
Long term care premiums paid
from account
Who owns account
Yes
Employee
No
Employer
Yes
Employer
Yes
No
No
Plan Document
Summary Plan Description
Special health insurance policy
required
Employer contributions
Employee contributions
IRS limit on contributions
Distributions for qualified
expenses
Account retained by employee at
termination
No
More Comparisons
• HRA’s are considered to benefit employers more while
HSA’s are considered more of a benefit to employees.
• HRA’s were created in 1954 and the rules are
considered stable while HSA’s were created in 2003 and
clarifications on the rules may still be pending.
• The employer has authority over how the funds are
spent for HRA’s while the employee controls how funds
are spent for HSA’s.
• Employers have the ability to exclude employees based
on type, age, length of service, etc… with HRA’s while
employers must make comparable contributions for all
employees with HSA’s.
Reminders on Medical
Savings Plans
• For FSA and HRA, coverage and reimbursement
is allowed for a child under age 26 at the end of
the year.
• For FSA, HSA and HRA, over the counter
medicine is not eligible for reimbursement
unless there is a prescription written for it.
• For HSA’s, distributions that are not used for
qualified medical expenses are subject to
taxation and a penalty if used before age 65.
Q & A Session
• Does anyone have any questions?
• How many companies have an FSA, HRA
or an HSA?
• How does it work for you?
• How do the employees respond?
• Any tips or information that can be shared
with others?
Links and Resources
• Link to the IRS Publication 969, Health Savings Accounts and Other
Tax-Favored Health Plans: http://www.irs.gov/pub/irs-pdf/p969.pdf
• Link to the IRS Publication 502, Medical and Dental Expenses:
http://www.irs.gov/pub/irs-pdf/p502.pdf
• Link to US Department of Treasury HAS Resource Center:
http://www.treasury.gov/resource-center/faqs/Taxes/Pages/HealthSavings-Accounts.aspx
• Link to the US Department of Labor topic and requirements on
Summary Plan Descriptions:
• http://www.dol.gov/dol/topic/health-plans/planinformation.htm
Flex-Pay offers FSA administration and HRA administration.
Please contact Kia Ramseur,
Section 125 Manager,
at Flex-Pay for additional information.
(336) 714-1208
kia@flex-pay.com