Consumer-Directed Health Plans (CDHPs): Which is better HSA or HRA?
Both HSAs and HRAs are best utilized with deductible base medical plans (required with HSA). Both are designed to be tools to help create awareness on the employees’ part as to the cost of medical services. Both provide tax-free reimbursements for “first dollar” medical expenses. But there are differences, and advantages and disadvantages depending on whether you are the employer or the employee. One basic difference is account structure:
- HRA accounts are “paper accounts”, owned, controlled and totally funded by the employer. The account does not have to be funded until an eligible medical reimbursement is made. HRA accounts can also be designed to allow or exclude many types of expenses.
- HSA accounts are actual individual accounts, owned and controlled by the employee. Contributions can be made by the employee and/or employer, but they belong to the employee. Therefore, these accounts are actually “pre-funded” and paid out of employee owned money.
Another major difference is rollover and accumulation features:
- HSA accounts belong to the employee. Therefore any amount in the account not used stays in the account and rolls over to the next year.
- HRAs are usually established so that employers maintain control of the money. HRA accounts can be structured with some, all, or no rollover features.
Since HSAs are employee owned, many feel that they will do a much better job of creating an incentive for employee prudent medical expense spending. However, HRAs can present a greater opportunity for employers to enjoy the benefits of an exceptionally good claims year. An alternative approach would be to allow a predetermined percentage of the HRA funds to roll over each year, building an accumulation for the employee, yet, still allowing the employer to save a larger percent of each medical expense dollar saved. Bundled Consumer Directed Plans There are also carrier-based plans that are consumer directed with HSA/HRA/FSA accounts that are very structured. Funding of HSA/HRA accounts is required and all monies roll over to the employee. While a consumer directed approach is a commitment of time and communication effort on the part of the employer; a bundled approach is certainly a longer term commitment in order to optimize results. Apply for your CDHP online!
HSA, HRA, FSA Comparison Chart
|Eligibility||Anyone under the age of 65 not qualifying for Medicare benefits and not covered by a lower deductible health plan.||Employees who belong to a company sponsored plan. Can be current and former employees. No restriction on group size.||Employees must work for an employer that provides an FSA.|
|Contributions||Made by Individual, employer or both. Contributions can be made by check, ACH or payroll deduction.||“IOU” account. No money is contributed.||Made by Employee via payroll deductions.|
|Contribution Amounts||Maximum contribution is equal to 100% of the deductible not to exceed $3,050 for individuals and $6,200 for family (2012).||No limitations.||Set by employer. Limited to advanced funding exposure.|
|Portability||Account belongs to individual and rolls over year to year.||Cannot be rolled over from one employer to another. Employer has no obligation to continue account once employee terminates employment.||Use it or lose it. Unused amounts are forfeited.|
|Taxability||Contributions are tax-free, interest earned is tax-free and withdrawals are tax-free as long as used for qualified medical expenses.||Reimbursements to employees are tax-free as long as they are used on qualified medical expenses.||Contributions are made through payroll deductions reducing taxable income.|
|Cafeteria Plan||Can be included in a cafeteria plan.||Cannot be included in a cafeteria plan.||Can be included in a cafeteria plan.|
|Catch up Provision||Individuals 55 or older may contribute an additional $1,000 in 2012. Married couples may both participate in the catch up provisions.||No.||No.|
|Roll overs/Unused Balances||Funds can be rolled over.||Funds do not have to be roll over year to year. Employer decides what amount, if any, can be used for future use. Provision must be detailed in plan document.||Money is forfeited back to employer at year end.|
|Covered Medical Expenses||Medical expenses covered under IRC 213(d) and qualified LTC premiums, medical premiums when paying under continuation of coverage provisions or unemployment. Funds used for non-qualified medical expenses are penalized 10% and taxed.||Medical expenses covered under IRC 213(d). However, the plan can be more limited to cover specific types of medical expenses. Not all 213(d) expenses must be allowable expensed for reimbursement. Unauthorized withdrawals may result in disqualification and tax consequences.||Medical expensed covered under IRC 213(d).|
|Type of Health Plan||High deductible health plan required. Individual deductible $1,200-$5,000. Family deductible $2,000-$10,000.||No requirements.||No requirements.|
|Interest||Interest is accrued tax-free||No interested may be accrued.||No interested may be accrued.|