FSAs, HRAs, and HSAs are three types of employee accounts your clients can take advantage of to give their employees yet another way to pay for qualified healthcare expenses. Insurance brokers can use these accounts as a means of encouraging clients to look at certain types of healthcare plans that would best benefit their employees. The key is knowing how to present the accounts to clients during the insurance discussion.
This post is by no means a comprehensive guide on the topic. Rather, it is intended as a resource of talking points to get the discussion started. Full details on all three accounts can be found in IRS Publication 696.
Presenting the three accounts to clients starts with the basics. The flexible spending account (FSA) is an account that employees can use to pay for a variety of qualifying expenses. They are not limited to healthcare expenses only. There are three types of FSAs for healthcare purposes:
- Healthcare FSA – Limited to eligible medical expenses not covered by health insurance
- Dependent Care FSA – Used to cover eligible dependent care services
- Limited Purpose FSA – Used to cover eligible dental and vision expenses.
Moving on, a health reimbursement account (HRA) is an employer-owned account for employees with employer-sponsored healthcare plans. It is followed by the health savings account (HSA), an employee owned bank account that can be used to cover eligible healthcare expenses and/or save for retirement. Note that all three are tax advantaged accounts.
The most glaring difference within these three accounts is found in ownership. Both FSAs and HRAs are set up by the employer on behalf of the employee. That makes the employer the owner of such accounts. The HSA is the only one of the three accounts that is employee owned. It is also the only one through which an employee can put money toward retirement.
Account ownership does influence how the three accounts are treated for tax purposes. However, tax-related differences are minor enough to be considered negligible.
Your clients might be interested in how account contributions work, especially if they plan to use one of the three accounts as an added benefit intended to improve hiring and retention. In this regard, the HRA may be the least desirable of the three. Only employers can contribute to HRAs on behalf of their workers.
FSAs and HSAs can receive contributions from employees, employers, and others as well. Some employers may choose to set up one of these accounts and offer matching contributions as an incentive to save. In this way, they encourage employees to contribute extra funds to their own healthcare while supporting them with an added benefit.
The HSA is often considered the strongest of the three accounts in this regard because of the ability to invest funds. Both employer and employee contributions can be used to cover eligible medical expenses. But they can also be invested in order to increase the account balance, thereby providing more funds for healthcare expenses.
High Deductible Health Plans
It should be noted that the HSA is only available to employees already paying into a high deductible health plan. Federal regulations stipulate what qualifies as a high deductible plan, so please look into those details before you present these three accounts to clients. Also note that employees are unable to use HSA funds until they have met the deductible requirement of their health plan.
FSAs, HRAs, and HSAs represent three ways to provide employees with additional funds for healthcare expenses. They are worth considering as your clients prepare for 2021.