Which Health Spending Account Is Right for Your Business?
December 26, 2017
Tim Schuster, a manager in EisnerAmper’s Private Business Services Group, examines the differences between health savings accounts (HSAs), health reimbursement accounts (HRAs), and flexible savings accounts (FSAs). Tim looks at things like who funds the plan, who owns it, taxation, contribution limits and what happens to unused funds at year’s end.
DP: So before we get into the differences Tim, what is the commonality among a Health Saving Account, has; Health Reimbursement Account, HRA; and Flexible Spending Account, FSA?
TS: Well, they’re all designated to pay for qualified medical expenses using a tax free fund.
DP: Let’s start with the HSA.
TS:So there’s a couple of facts here about an HSA that are applicable to pretty much everybody. An employee or an employer can fund this completely tax free. An employee needs to be enrolled in a high-deductible health plan, that’s very important. Funds can roll over year to year if they are not used. The employee, not the company,owns the account. There are annual contribution limits to each account limited to whatever account is set up by the employer, and they can be used as an investment vehicle subject to market forces. So, of course, if the market is doing well, more likely than not your HSA accounts can also be doingwell. There are actual contribution limits,. Contribution limits are $3,450 for the individual and $6,900 for a family.
DP: Now let’s move on to the HRA.
TS:They are funded and owned solely by the employer. Now one thing to keep in mind is that these are not via a payroll deduction. Unused money will go back to the employer, which can continue to fund the HRA. You can continue funding this account if the employer can utilize these funds in that fashion. Employers reimburse employees only after employees incur approved medical expenses. So you do have to go through an approval process first, before an employee can use those funds.
TS:There is a maximum amount of qualified expenses for a coverage period. And some HRA types do not have a minimum or maximum employer contribution limit. For a traditional HRA there are no limits.
DP: And finally FSAs.
TS: Of course. You’re getting a little alphabet soup here.
DP: Not me, the government.
TS:So with the FSA an employee sets aside a portion of earnings for qualified medical expenses for the employee, the spouse, and the dependents. These are not – NOT – subject to payroll taxes. The amount that can be saved is limited to $2,650 medical per person per year and $5,000 for dependent care. Employees can carry up to about $500 into the following yearand the rest they will lose. There are several types such as medical or dependent care FSAs and that can be talked about a little later as well and employers can match but are not required to match what’s in an FSA. That’s huge too.
TS:Employers are not required to do that. Also, probably worth mentioning that 2% owners or more of pass through entities are not eligible to participate in an HRA or FSA. The owners can only participate with an HSA.
DP: Now for closely held businesses that are considering setting up a health care spending account for their employees, what should they look for from their business advisors, from people such as yourself?
TS:Well, actually one thing I just want to talk about briefly is how EisnerAmper is actually a full advisory firm in that fashion. You know, this is a very common thing where our clients will come to us trying to figure out what is the best course of action for either setting up an HSA, an HRA or an FSA. But things to kind of think about, too, if it’s not one of us here that’s helping you is just make sure you work with your benefits and your tax advisor to examine the pros and cons of each option and to see what’s best for your company. You know, you’ll need to examine the correlation among, one, the health plan, two, an employee contribution, and also what the employer cost put is because this is a cost to the company, so there’s one thing’s you want to do is try to mitigate those costs by using your tax advisor, your business advisors.
DP: Right. And it sounds like it’s not one size fits all. These are really custom to each company.
TS:Exactly. It truly is. It’s one of those things where you do have to do a little shopping and your homework on.
DP: Ok, well Tim, thanks for this valuable information.
TS:Oh, it’s my pleasure Dave.
DP: And thank you for listening to the Bottom Line as part of the EisnerAmper podcast series. If you have any questions or there’s a topic you’d like us to cover email us at contact@EisnerAmper.com. And visit EisnerAmper.com for more information on this, and a host of other topics.