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Trying to decide which of the many employer-sponsored benefits out there to offer employees can leave an employer feeling lost in a confusing bowl of alphabet soup—HSA? FSA? DCAP? HRA? What does it mean if a benefit is “limited” or “post-deductible”? Which one is use-it-or-lose-it? Which one has a rollover? What are the limits on each benefit?—and so on.

While there are many details to cover for each of these benefit options, perhaps the first and most important question to answer is: which of these benefits is going to best suit the needs of both my business and my employees? In this article, we will cover the basic pros and cons of Flexible Spending Arrangements (FSA), Health Savings Accounts (HSA), and Health Reimbursement Arrangements (HRA) to help you better answer that question.

Flexible Spending Arrangements (FSA)

An FSA is an employer-sponsored and employer-owned benefit that allows employee participants to be reimbursed for certain expenses with amounts deducted from their salaries pre-tax. An FSA can include both the Health FSA that reimburses uncovered medical expenses and the Dependent Care FSA that reimburses for dependent expenses like day care and child care.

Pros:

  • Benefits can be funded entirely from employee salary reductions (ER contributions are an option)
  • Participants have access to full annual elections on day 1 of the benefit (Health FSA only)
  • Participants save on taxes by reducing their taxable income; employers save also by paying less in payroll taxes like FICA and FUTA
  • An FSA allows participants to “give themselves a raise” by reducing the taxes on healthcare expenses they would have had anyway

Cons:

  • Employers risk losing money should an employee quit or leave the program prior to fully funding their FSA election
  • Employees risk losing money should their healthcare expenses total less than their election (the infamous use-it-or-lose-it—though there are ways to mitigate this problem, such as the $500 rollover option)
  • FSA elections are irrevocable after open enrollment; only a qualifying change of status event permits a change of election mid-year
  • Only so much can be elected for an FSA. For 2018, Health FSAs are capped at $2,650, and Dependent Care Accounts are generally capped at $5,000
  • FSA plans are almost always offered under a cafeteria plan; as such, they are subject to several non-discrimination rules and tests

Health Savings Accounts (HSA)

An HSA is an employee-owned account that allows participants to set aside funds to pay for the same expenses that are eligible under a Health FSA. Also like an FSA, these accounts can be offered under a cafeteria plan so that participants may fund their accounts through pre-tax salary reductions.

Pros:

  • HSAs are “triple-tax advantaged”—the contributions are tax free, the funds are not taxed if paid for eligible expenses, and any gains on the funds (interest, dividends) are also tax-free
  • HSAs are portable, employee-owned, interest-bearing bank accounts; the account remains with the employees even if they leave the company
  • Certain HSAs allow participants to invest a portion of the balance into mutual funds; any earnings on these investments are non-taxable
  • Upon reaching retirement, participants can use any remaining HSA funds to pay for any expense without a tax penalty (though normal taxes are required for non-qualified expenses); also, retirees can use the funds tax-free to pay premiums on any supplemental Medicare coverage. This feature allows HSAs to operate as a secondary retirement fund
  • There is no use-it-or-lose-it with HSAs; all funds employees contribute stay in their accounts and remain theirs in perpetuity. Also, participants may alter their deduction amounts at any time
  • Like FSAs, employers can either allow the HSA to be entirely employee-funded, or they may choose to also make contributions to their employees’ HSA accounts
  • Even though they are often offered under a cafeteria plan, HSAs do not carry the same non-discrimination requirements as an FSA. Moreover, there is less administrative burden for the employer as the employees carry the liability for their own accounts

Cons:

  • To open and contribute to an HSA, an employee must be covered by a qualifying high deductible health plan; moreover, they cannot be covered by any other health coverage (a spouse’s health insurance, an FSA (unless limited), or otherwise)
  • Participants are limited to reimburse only what they have contributed—there is no “front-loading” like with an FSA
  • Participant contributions to an HSA also have an annual limit. For 2018, that limit is $3,450 for an employee with single coverage and $6,900 for an employee with family coverage (participants over 55 can add an additional $1,000; also, remember there is no total account limit)
  • Participation in an HSA precludes participation in any other benefit that provides health coverage. This means employees with an HSA cannot participate in either an FSA or an HRA. Employers can work around this by offering a special limited FSA or HRA that only reimburses dental and vision benefits, meets certain deductible requirements, or both
  • HSAs are treated as bank accounts for legal purposes, so they are subject to many of the same laws that govern bank accounts, like the Patriot Act. Participants are often required to verify their identity to open an HSA, an administrative burden that does not apply to either an FSA or an HRA

Health Reimbursement Arrangements (HRA)

An HRA is an employer-owned and employer-sponsored account that, unlike FSAs and HSAs, is completely funded with employer monies. Employers can think of these accounts as their own supplemental health plans that they create for their employees

Pros:

  • HRAs are extremely flexible in terms of design and function; employers can essentially create the benefit to reimburse the specific expenses at the specific time and under the specific conditions that the employers want
  • HRAs can be an excellent way to “soften the blow” of an increase in major medical insurance costs—employers can use an HRA to mitigate an increase in premiums, deductibles, or other out-of-pocket expenses
  • HRAs can be simpler to administer than an FSA or even an HSA, provided that the plan design is simple and efficient: there are no payroll deductions to track, usually less reimbursements to process, and no individual participant elections to manage
  • Small employers may qualify for a special type of HRA, a Qualified Small Employer HRA (or QSEHRA), that even allows participants to be reimbursed for their insurance premiums (special regulations apply)
  • Funds can remain with the employer if someone terminates employment and have not submitted for reimbursement

Cons:

  • HRAs are entirely employer funded. No employee funds or salary reductions may be used to help pay for the benefit. Some employers may not have the funding to operate such a benefit
  • HRAs are subject to the Affordable Care Act. As such, they must be “integrated” with major medical coverage if they provide any sort of health expense reimbursement and are also subject to several regulations
  • HRAs are also subject to many of the same non-discrimination requirements as the Health FSA
  • HRAs often go under-utilized; employers may pay an amount of administrative costs that is disproportionate to how much employees actually use the benefit
  • Employers can often get “stuck in the weeds” with an overly complicated HRA plan design. Such designs create frustration on the part of the participants, the benefits administrator, and the employer

For help in determining which flexible benefit is right for your business, contact us!

by Blake London
Originally posted on ubabenefits.com

Taking control of health care expenses is on the top of most people’s to-do list for 2018.  The average premium increase for 2018 is 18% for Affordable Care Act (ACA) plans.  So, how do you save money on health care when the costs seems to keep increasing faster than wage increases?  One way is through medical savings accounts.

Medical savings accounts are used in conjunction with High Deductible Health Plans (HDHP) and allow savers to use their pre-tax dollars to pay for qualified health care expenses.  There are three major types of medical savings accounts as defined by the IRS.  The Health Savings Account (HSA) is funded through an employer and is usually part of a salary reduction agreement.  The employer establishes this account and contributes toward it through payroll deductions.  The employee uses the balance to pay for qualified health care costs.  Money in HSA is not forfeited at the end of the year if the employee does not use it. The Health Flexible Savings Account (FSA) can be funded by the employer, employee, or any other contributor.  These pre-tax dollars are not part of a salary reduction plan and can be used for approved health care expenses.  Money in this account can be rolled over by one of two ways: 1) balance used in first 2.5 months of new year or 2) up to $500 rolled over to new year.  The third type of savings account is the Health Reimbursement Arrangement (HRA).  This account may only be contributed to by the employer and is not included in the employee’s income.  The employee then uses these contributions to pay for qualified medical expenses and the unused funds can be rolled over year to year.

There are many benefits to participating in a medical savings account.  One major benefit is the control it gives to employee when paying for health care.  As we move to a more consumer driven health plan arrangement, the individual can make informed choices on their medical expenses.  They can “shop around” to get better pricing on everything from MRIs to prescription drugs.  By placing the control of the funds back in the employee’s hands, the employer also sees a cost savings.  Reduction in premiums as well as administrative costs are attractive to employers as they look to set up these accounts for their workforce.  The ability to set aside funds pre-tax is advantageous to the savings savvy individual.  The interest earned on these accounts is also tax-free.

The federal government made adjustments to contribution limits for medical savings accounts for 2018.  For an individual purchasing single medical coverage, the yearly limit increased $50 from 2017 to a new total $3450.  Family contribution limits also increased to $6850 for this year.  Those over the age of 55 with single medical plans are now allowed to contribute $4450 and for families with the insurance provider over 55 the new limit is $7900.

Health care consumers can find ways to save money even as the cost of medical care increases.  Contributing to health savings accounts benefits both the employee as well as the employer with cost savings on premiums and better informed choices on where to spend those medical dollars.  The savings gained on these accounts even end up rewarding the consumer for making healthier lifestyle choices with lower out-of-pocket expenses for medical care.  That’s a win-win for the healthy consumer!

As 2017 comes to a close, it’s time to act on the money sitting in your Flexible Spending/Savings Account (FSA). Unlike a Health Savings Account or HSA, pre-taxed funds contributed to an FSA are lost at the end of the year if an employee doesn’t use them, and an employer doesn’t adopt a carryover policy.  It’s to your advantage to review the various ways you can make the most out of your FSA by year-end.

Book Those Appointments

One of the first things you should do is get those remaining appointments booked for the year. Most medical/dental/vision facilities book out a couple of months in advance, so it’s key to get in now to use up those funds.

Look for FSA-Approved Everyday Health Care Products

Many drugstores will often advertise FSA-approved products in their pharmacy area, within a flyer, or on their website. These products are usually tagged as “FSA approved”. Many of these products include items that monitor health and wellness – like blood pressure and diabetic monitors – to everyday healthcare products like children’s OTC meds, bandages, contact solution, and certain personal care items. If you need to use the funds up before the end of the year, it’s time to take a trip to your local drugstore and stock up on these items.

Know What’s Considered FSA-Eligible

Over the last several years, the IRS has loosened the guidelines on what is considered eligible under a FSA as more people became concerned about losing the money they put into these plans. There are many items that are considered FSA-eligible as long as a prescription or a doctor’s note is provided or kept on file. Here are a few to consider:

  • Acupuncture. Those who suffer from chronic neck or back pain, infertility, depression/anxiety, migraines or any other chronic illness or condition, Eastern medicine may be the way to go. Not only are treatments relatively inexpensive, but this 3,000 year old practice is recognized by the U.S. National Institute of Health and is an eligible FSA expense.
  • Dental/Vision Procedures. Dental treatment can be expensive—think orthodontia and implants. While many employers may offer some coverage, it’s a given there will be out-of-pocket costs you’ll incur. And, eye care plans won’t cover the cost of LASIK, but your FSA will. So, if you’ve been wanting to correct your vision without the aid of glasses or contacts, or your needing to get that child braces, using those FSA funds is the way to go.
  • Health-boosting Supplements. While you cannot just walk into any health shop and pick up performance-enhancing powder or supplements and pay with your FSA card, your doctor may approve certain supplements and alternative options if they deem it to benefit your health and well-being. A signed doctor’s note will make these an FSA-eligible expense.
  • Smoking-cessation and Weight-Loss Programs. If your doctor approves you for one of these programs with a doctor’s note deeming it’s medically necessary to maintain your health, certain program costs can be reimbursed under an FSA.

Talk to Your HR Department

When the IRS loosened guidelines a few years ago, they also made it possible for participants to carry over $500 to the next year. Ask Human Resources if your employer offers this, or if they provide a grace period (March 15 of the following year) to turn in receipts and use up funds. Employers can only adopt one of these two policies though.

Plan for the Coming Year

Analyze the out-of-pocket expenses you incurred this year and make the necessary adjustments to allocate what you believe you’ll need for the coming year. Take advantage of the slightly higher contribution limit for 2018.  If your company offers a FSA that covers dependent care, familiarize yourself with those eligible expenses and research whether it would be to your advantage to contribute to as well.

Flexible Spending/Saving Accounts can be a great employee benefit offering tax advantages for employees that have a high-deductible plan or use a lot of medical. As a participant, using the strategies listed above will help you make the most out of your FSA.

A health flexible spending account (FSA) is a pre-tax account used to pay for out-of-pocket health care costs for a participant as well as a participant’s spouse and eligible dependents. Health FSAs are employer-established benefit plans and may be offered with other employer-provided benefits as part of a cafeteria plan. Self-employed individuals are not eligible for FSAs.

Even though a health FSA may be extended to any employee, employers should design their health FSAs so that participation is offered only to employees who are eligible to participate in the employer’s major medical plan. Generally, health FSAs must qualify as excepted benefits, which means other nonexcepted group health plan coverage must be available to the health FSA’s participants for the year through their employment. If a health FSA fails to qualify as an excepted benefit, then this could result in excise taxes of $100 per participant per day or other penalties.

Contributing to an FSA

Money is set aside from the employee’s paycheck before taxes are taken out and the employee may use the money to pay for eligible health care expenses during the plan year. The employer owns the account, but the employee contributes to the account and decides which medical expenses to pay with it.

At the beginning of the plan year, a participant must designate how much to contribute so the employer can deduct an amount every pay day in accordance with the annual election. A participant may contribute with a salary reduction agreement, which is a participant election to have an amount voluntarily withheld by the employer. A participant may change or revoke an election only if there is a change in employment or family status that is specified by the plan.

Per the Patient Protection and Affordable Care Act (ACA), FSAs are capped at $2,600 per year per employee. However, since a plan may have a lower annual limit threshold, employees are encouraged to review their Summary Plan Description (SPD) to find out the annual limit of their plan. A participant’s spouse can put $2,600 in an FSA with the spouse’s own employer. This applies even if both spouses participate in the same health FSA plan sponsored by the same employer.

Generally, employees must use the money in an FSA within the plan year or they lose the money left in the FSA account. However, employers may offer either a grace period of up to two and a half months following the plan year to use the money in the FSA account or allow a carryover of up to $500 per year to use in the following year.

By Danielle Capilla
Originally Published By United Benefit Advisors

Switching over to AEIS Advisors was the best decision we’ve made this year. Ronald and his team were able to identify discrepancies on our billing statements which got missed by our last broker, and they saved us over $8,000 in credits! AEIS has proven to be an attentive and caring company, looking out for the best needs of their clients."

- Director of Operations

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