Overview

Health Reimbursement Arrangements (HRAs), Flexible Spending Accounts (FSAs), Medical Expense Reimbursement Plans (MERPs); alternative ways to fund your employee’s health plan benefits may come in different forms, but the concept always holds true: save money on your health plan by purchasing a low-cost, High Deductible Health Plan (HDHP) and pair it with an HRA, MERP or FSA to provide your employees with a strong benefit plan that’s both cost-effective and coverage-rich for your employees and their families.

First, a little overview:

What is Consumer Driven Health Care (CDHC)?

Consumer Driven Health Care is a concept where employees enroll in a High Deductible Health Plan (HDHP) and are allowed to use a Health Reimbursement Arrangement (HRA) or Flexile Spending Account (FSA) to pay for out of pocket medical expenses which are subject to their high deductible.

What is a High Deductible Health Plan (HDHP)?

This often refers to a major medical plan with a deductible of more than $1,300. Some HDHPs offer “deductible waived” copays for basic services like office visits and generic prescription drugs, but in most cases, medical services are discounted by the insurance company, then applied toward the employee’s deductible. HDHPs tend to be among the lowest cost health plans, as they do a great job limiting an employee’s major expenses each year, while putting the employee in the driver’s seat when it comes to making decisions about lower cost treatments. HDHPs are a perfectly designed to be paired with an HRA or FSA.

The Premise

Employers can purchase a High Deductible Health Plan, which are often less expensive than lower deductible plan options, and use the savings to fund a reimbursement plan for their employees. Since it is often the case that many employees use very little health care throughout the year, employers don’t have to waste money by purchasing richer coverage that their employees don’t use. Instead, employers can make funds available to employees who need it, through a reimbursement plan, but retain the unused funds of employees who don’t need them.

Most importantly, all employer contributions to a qualified reimbursement plan are 100% tax deductible to the employer, and tax-free to the employee! Employers have a lot of flexibility in determining what expenses are eligible under the certain types of reimbursement plans.

Let’s take a look at the various reimbursement plan options available through RT Benefit Administrators:

About HRAs

What is a Health Reimbursement Arrangement (HRA) or Medical Expense Reimbursement Plan (MERP)?

Under Section 105 of the Internal Revenue Code, employers are allowed to help pay for certain out of pocket medical expenses for their employees, and receive a tax benefit on the funds they spend toward these employee’s medical expenses. This “arrangement” is called a Health Reimbursement Arrangement (HRA). If the reimbursement plan is structured to only reimburse for medical expenses, this may also be referred to as a Medical Expense Reimbursement Plan (MERP). The terms are very similar and are governed by the same IRS code. Some also refer to this concept as a “Wrap Plan”.

How does an HRA through RT Benefit Administrators work?

Step 1 – The employer decides how much money they would like to make available to each employee toward approved out of pocket health care expenses on an annual basis. Each eligible employee has access to the same dollar amount, though the employer may choose to offer more funds to employees with dependents on the plan.

Step 2 – Each employee receives a debit card, called a “Benny™ Card” (See “Benefit Debit Card” section for more details), which is tied to a funding account that the employer can put money into. The employer will need to make a deposit to this account to get it started, but will then only make deposits to cover the employee’s actual incurred expenses on their Benny™ Cards each week.

Step 3 – Employees may use their Benny™ Card to pay for approved out of pocket medical expenses, up to their annual limit. Once the Benny™ Card has reached the limit, the employee will have to use their own funds to pay for expenses until the Benny™ Card balance is reset the following year.

Step 4 – Employers fund their employee’s purchases on a weekly basis. The Benny™ Card will only work at approved health facilities, so you can be confident the company’s money will not be spent on unapproved expenses. RT Benefit Administrators will facilitate the administration of the Benny™ Cards and keep a close eye on their usage. Employers receive weekly reports with information about the Benny™ Card transactions from the prior week.

Step 5 – Employees are satisfied with having additional funds to pay for their expenses. Employers do not spend money that is not used by employees, resulting in lower overall costs AND higher employee satisfaction.

About FSAs

What is a Flexible Spending Account (FSA)?

Flexible Spending Accounts, also known as a “Cafeteria Plan” or “Section 125 Plan”, is a federal income tax provision which allows employees to put some of their own paycheck into a spending account to be used for out of pocket health care costs or dependent day care program costs. Employees do not have to pay any taxes on the money they put into the FSA, but can only use these funds for qualified expenses (see IRS Publication 502 for additional guidance **link this sentence to http://www.irs.gov/pub/irs-pdf/p502.pdf).

Use-it-or-lose-it Rule

Generally, if an employee does not use all the funds they have elected for the year by the end of the plan year (usually a calendar year), they will forfeit any unused funds. However, some employers may choose to allow up to $500 per year in rollover contributions or a 75 day grace period for employees to incur additional qualified expenses past the end of the plan year, to be able to spend down any unused funds. These additional allowances are allowed under the code, but are not required. Employers may choose to offer either provision or neither (but not both).

How does an FSA through RT Benefit Administrators work?

Step 1 – First the employee must decide if they would like to elect to put funds into their “Medical Reimbursement” account, their “Dependent Day Care” account, or both. Elections are made separately to each account type and have separate limits (see annual election limits below for more details).

Step 2 – At the beginning of the plan year, which usually starts on January 1st and runs through December 31st, employees will have the opportunity to make an annual “election”, where they formally specify the annual dollar amount they would like withheld from their paychecks. This annual amount is spread out evenly over each paycheck throughout the year and is deducted from their paychecks on a pre-tax basis and held in their FSA account on their behalf.

Step 3 – Employees make qualified purchases throughout the year, and as they do so, they may submit their receipts and receive a reimbursement from their FSA account.

  1. For Medical Reimbursement accounts, employees may receive reimbursements for qualified expenses up to their full annual election amount as early as the first day of the plan year, regardless of how much the employee has actually contributed to the account.
  1. For Dependent Day Care accounts, employees may only receive reimbursements for amounts up to their current contribution balance. For example, if an employee elected to withhold $100 per paycheck, after two pay periods, the employee could only seek reimbursements up to the account balance: $200.

This effectively allows employees to pay for qualified expenses using tax free money, therefore saving an amount equal to what they would have paid in income taxes on those funds. If the employee is effectively paying 15% in income taxes, they will save 15% on their qualified expense. It’s that simple!

What are the annual election limits for FSA accounts?

Employees and the Employer may contribute to an employee’s FSA account. The employee’s contribution must not exceed $2,550 in 2016 for Medical Expense reimbursement accounts. Employees may not contribute more than $5,000 in 2016 toward their Dependent Care reimbursement accounts ($2,500 for employees who are married but file separate returns). In addition to the above maximum employee contribution limits, employers may also contribute funds to employee accounts, and employer contributions are not counted towards the employee’s maximum contribution amount; therefore, employees may have balances that exceed the contribution limit as a result of additional employer funding.

FSA Tips and Reminders!

  • Unless the Employer allows for a 75 day grace period or a rollover contribution of up to $500, an FSA plan is a use-it-or-lose-it plan, so be sure to make your annual elections wisely. It is always advised to be conservative when considering how much to contribute to your account each year and not elect more than you can spend down during the year.
  • FSA funds cannot be used to pay insurance premiums.
  • Be sure to review IRS Publication 502 for a complete list of approved expenses and a definition of a qualified dependent.
  • Medical Expense reimbursement funds can be used for immediate family members and certain medical, dental, vision and other health related expenses which may not be covered by your insurance plan.
  • FSA funds may be used for over-the-counter medications with a doctor’s written prescription.

Comparison of HRAs and FSAs

Though both “alternative funding options” are similar in that they provide employers and employees tax free or tax favored options to help pay for the employee’s out of pocket health care expenses which apply toward their High Deductible Health Plan (HDHP). This concept is also known, collectively, as “Consumer Driven Health Care” (CDHC).

Let’s break down the differences in a side-by-side comparison chart:

HRA FSA

Who owns the account and funds?

Employer

Employee, except for funds forfeited at the end of the plan

Employees Can Contribute?

  No  Yes

Employers Can Contribute?

 Yes Yes

Contributions are Income Tax deductible?

 Yes, to employer only Yes

Withdrawals for qualified expenses are tax free?

 Yes Yes

Annual Contribution limits?

 No

Yes, See “About FSAs” for details

Funds may rollover?

Maybe, if employer allows it

 Maybe, if employer allows it and limits apply. See “About FSAs” for details.