Tax-Advantaged Ways To Help Employees Pay For Healthcare
As the cost of health insurance has increased, employers have been forced to share more of the burden with employees.
While most employers can no longer afford to absorb the entire cost of health insurance, they can help by providing tax-advantaged accounts for employees that make it easier for them to absorb some of the costs. In many cases, employers have switched to health insurance with a higher deductible and have used some of the savings to fund Health Reimbursement Arrangements (HRA), Flexible Spending Accounts (FSAs) or both.
- Health Reimbursement Arrangement (HRA). An HRA reimburses employees and their families for medical expenses up to a maximum dollar amount per coverage period. Unused funds are carried forward. The employer decides what is covered by the HRA. For example, it may be used solely for medical expenses, or it can provide reimbursement for dental expenses, vision or both. If the HRA complies with IRS regulations, employees will not be taxed on the value of the reimbursements they receive or on the balance in their accounts. In addition, the employer will be entitled to a deduction.
- Flexible Spending Accounts (FSAs) are a similar option, but are paid for by employees using pre-tax income. Unlike funds in HRAs, unused funds in FSAs cannot be carried forward to the next coverage period.
HRAs and FSAs are often used together. When they are, technically HRA benefits must be exhausted before FSA funds are used. However, the plan can be drafted to specify that HRA funds are available only after expenses exceeding the dollar amount of the FSA have been paid. As a result, an employee may exhaust FSA funds, which cannot be carried over, before tapping into HRA funds, which can be carried over.
The employee must demonstrate that HRA and FSA expenses are for approved healthcare costs. Many employers who have used either HRAs, or HRAs combined with FSAs, have been saving tens of thousands of dollars a year. Statistics from The Choice Care Card, a medical debit card company, found that utilization rates for HRAs historically average between 21% and 35%. In 2007, the average utilization rate was 30.89%. In other words, 385 groups funded HRAs with $24,163,121 and only $7,463,866 of that amount was used.
These statistics support the conclusion that when employees use some of their own money to pay for healthcare, they will seek medical care only when they truly need it.Employers who decide to use a high-deductible plan with an HRA should explain it carefully to their employees. Employees need to understand clearly how such an approach can save money for them, not just for the employer.
Debit Cards Ideal For Tracking Health Expenses
Tracking the use of Health Reimbursement Arrangements (HRA) and Flexible Spending Accounts (FSAs) doesnt have to be an administrative burden.
Some companies have made debit cards available expressly for that purpose. The debit cards are designed so that they can be used only for qualifying expenses. If the employee tries to use the card to pay for non-reimbursable expenses, it wont work.
The ability to track HRA and FSA expenses using debit cards greatly reduces the administrative burden and is helping to make them more popular among mid-sized and even relatively small businesses.
Employers have flexibility in how employees use the card. For example, if an employee is covered by a spouses plan, the employer may allow the employee to use the card to cover expenses that are not covered by the spouses plan, such as dental care, vision care or alternative treatments, such as acupuncture and chiropractic care.
The employer may also choose to allow some or all of the unspent funds to roll over from year to year. Employees may also contribute additional funds to their accounts through pre-tax payroll contributions.
Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. This article is written for informational purposes only and should not be construed as providing legal advice.