Making Sense of the Alphabet Soup of Healthcare Spending Accounts
Original post benefitnews.com
Employers are passing more and more healthcare responsibility to their employees, and in some cases, giving them a greater share of the financial burden. Likewise, businesses are looking for ways to help employees manage healthcare expenses. There are a number of products for that purpose, and while they’re similar, they’re not the same.
With acronyms being used to explain still-new concepts, it can be difficult for employees to understand the difference between them or even to remember which product they use. It’s important to educate them about these products so they get the most out of them.
Health savings account. A health savings account is like a 401(k) retirement account for qualified medical expenses. An HSA helps people pay for medical expenses before they hit their deductible. Employers and employees can both contribute money tax-free, and the money can be rolled over from year to year with only a maximum annual accrual. All contributed funds can be invested once a specific minimum is met (determined by the bank).
HSA-compatible health plans don’t include first-dollar coverage (except for preventive care), which means employees must meet a deductible before benefits will be paid by a health plan. This deductible is set by the IRS each year; in 2016, high-deductible health plans must have a deductible of at least $1,300 for an individual and $2,600 for a family.
Employees and employers can both contribute funds to build an HSA, and all funds count toward the annual maximum. The employee “owns” the HSA and the money that’s in it.
HSA funds can be spent on qualified medical expenses as outlined by section 213(d) of the IRS tax code, dental, vision, Medicare and long-term care premiums, and COBRA (if unemployed). After age 65, health premiums can also be withdrawn, but are subject to income tax.
Just like a 401(k), the account is portable. If the owner of the HSA changes jobs, the money can still be used for medical expenses, but the employee can no longer contribute to it.
Health reimbursement accounts. HRAs help employees pay for medical expenses before a deductible is met. But unlike an HSA, employees cannot contribute to an HRA, only employers. The money an employer places in an HRA can be used for medical expenses not covered by a health plan, such as deductibles and copays for qualified medical expenses as outlined by section 213(d) of the IRS tax code, dental, vision, Medicare and long-term care premiums. The associated health plan can have any deductible amount — there are no minimums and the plan does not have to be a high-deductible health plan. Unlike an HSA, an HRA is not portable, and funds can’t be used for non-medical reasons, even with a penalty. Funds also don’t typically earn interest and are not invested.
Employers must be more involved with HRA accounts since they are the only party who can deposit money; they also determine if funds can be rolled over from one year to the next.
Flexible spending accounts. FSAs allow employees to defer part of their income to pay for medical expenses tax free as part of a Section 125 cafeteria plan. Allowable expenses include those outlined by section 213(d) of the IRS tax code as well as dental and vision expenses. Both employers and employees can contribute to an FSA; however, the amount employees plan to contribute at the beginning of the year can’t be changed mid-year. FSA funds can’t be invested and fees associated with the plan are normally paid by the employer. There are no underlying plan restrictions and these accounts can be maintained alongside traditional health plans. The employer owns the account and is responsible for the management.
Funds in an FSA can be rolled over only if there is a carryover provision; in this case, $500 can be carried to the next year.
With an FSA, individuals must substantiate need for a reimbursement at the time of service by keeping receipts and filling out a form. Some FSAs include “smart” debit cards that automatically pay certain copays and don’t require documentation.
Determining which is best
HSAs, HRAs and FSAs serve slightly different purposes and can even co-exist in some circumstances. For example, those enrolled in an HSA can contribute to a limited-used FSA. Those enrolled in an HRA can also contribute to an FSA without limitations.
HSAs work well for employers who don’t want to add to administrative burdens or additional costs. And they’re a great way to give employees a way to offset the costs of qualified high-deductible health plans and save for post-retirement health expenses. However, employers may want to stray from an HSA or refrain from fully funding the account early in the year if there’s high turnover at a company; the money deposited goes with the employee when they leave.
For employees, HSAs provide investment opportunity and are portable; they also encourage consumerism and are cost-effective to administer. But one of the biggest advantages is that the employee doesn’t have to pre-determine expenses since unused funds carry over.
HRAs can work well for an employer that is not offering a qualified high-deductible health plan but wants to promote consumerism while self-funding a portion of the risk. The funds contributed are immediately available and completely funded by the employer, which is an advantage to the employee. However, there is no tax advantage to employees and the fund can’t be transferred.
FSAs are the most appropriate for employers offering traditional health plans. Employees benefit because they can contribute pre-tax dollars and the funds are immediately available. But the “use it or lose it” provision is a definite disadvantage for employees.
There are pros and cons to all three funds. It’s best to review them carefully to determine which ones will work for your business, and make sure to communicate the funds’ features and restrictions to your employees.
IRS Issues Higher Limits for HSA Contributions for 2014
Original article https://www.shrm.org
By Stephen Miller
The Internal Revenue Service announced higher limits for 2014 on contributions to health savings accounts (HSAs) and for out-of-pocket spending under high-deductible health plans (HDHPs) linked to them.
In Revenue Procedure 2013-25, issued May 2, 2013, the IRS provided the inflation-adjusted HSA contribution and HDHP minimum deductible and out-of-pocket limits, effective for calendar year 2014. The higher rates reflect a cost-of-living adjustment and rounding rules under Internal Revenue Code Section 223.
A comparison of the 2014 and 2013 limits is shown below:
|
|
Calendar Year 2013 |
Calendar Year 2014 |
||
|
Self-only |
Family |
Self-only |
Family |
|
|
Annual Contribution Limit |
$3,250 |
$6,450 |
$3,300 |
$6,550 |
|
HDHP Minimum Deductible |
$1,250 |
$2,500 |
$1,250 (no change) |
$2,500 (no change) |
|
HDHP Out-of-Pocket Limit |
$6,250 |
$12,500 |
$6,350 |
$12,700 |
The increases in contribution limits and out-of-pocket maximums from 2013 to 2014 were somewhat lower than the increases a year earlier, reflecting the government's calculation of a more modest inflation rate. From 2012 to 2013 the contribution limit rose $150 for individual coverage and $200 for family plans, while maximum out-of-pocket amounts rose $200 for individuals and $400 for families, and HDHP minimum deductible amounts rose $50 for individuals and $100 for families.
Penalties for Nonqualified Expenses
Those under age 65 (unless totally and permanently disabled) who use HSA funds for nonqualified medical expenses face a penalty of 20 percent of the funds used for such expenses. Funds spent for nonqualified purposes are also subject to income tax.
Coverage of Adult Children
While the Patient Protection and Affordable Care Act allows parents to add their adult children (up to age 26) to their health plans, the IRS has not changed its definition of a dependent for health savings accounts. This means that an employee whose 24-year-old child is covered on his HSA-qualified high-deductible health plan is not eligible to use HSA funds to pay that child’s medical bills.
If account holders can't claim a child as a dependent on their tax returns, then they can't spend HSA dollars on services provided to that child. According to the IRS definition, a dependent is a qualifying child (daughter, son, stepchild, sibling or stepsibling, or any descendant of these) who:
- Has the same principal place of abode as the covered employee for more than one-half of the taxable year.
- Has not provided more than one-half of his or her own support during the taxable year.
- Is not yet 19 (or, if a student, not yet 24) at the end of the tax year or is permanently and totally disabled.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Best HSAs combine attractive plan, good communication
By Tristan Lejeune
Source: https://eba.benefitnews.com
If your promotion plan for your health savings account starts and ends with open enrollment, you’re losing enrollees and impact, two benefits experts maintain.
Jennifer Benz and Dennis Triplett are perhaps uniquely qualified to discuss education and strategy surrounding health savings account administration together, as their professional collaboration centers around developing exactly that strategy. Speaking to employers, brokers and providers last week at Benefits Forum & Expo, the communications expert and the UMB Healthcare Services CEO, respectively, shared techniques for maximizing enrollment and effective account management.
“We began working with Jen and her staff a couple years ago around the whole notion of communication, which we see a deficit of, honestly, in the success around HSAs,” Triplett said.
Speaking at Benefits Forum & Expo in Phoenix, the pair said there are two key aspects of maximizing HSA potential: attractive plan design and effective communications. And one of the simplest parts of each, according to Benz, is getting the name right.
“We see a lot of companies hanging onto these really confusing or counterintuitive plan names,” Benz said. “So if you call the health plan the HDHP or you call it the Catastrophe Plan or you call it the high-deductible plan, you know that’s not super, super appealing.”
Triplett emphasized letting the plans sell themselves. Employers should make sure their HSA actually has features like tax breaks and a catch-up contribution for older workers and then just present them accurately and engagingly.
Benz agreed, saying that a “robust, ongoing education” was far superior to trying to cram information in in the weeks and months leading up to enrollment.
“We know how to get people into these plans for the most part – you promote the heck out of the plan during enrollment, you give people a million different ways to understand the plans, you give the personal testimonials, you give them cost calculators, you give them great scenarios, you make the plan really attractive in terms of how the contributions stack up and you make that really clear, but a lot of companies just stop at that point,” she said. “Where it really comes to getting the most value out of consumer-driven strategy is getting people to use those plans properly throughout the year.”
Triplett said far too many consumers treat their HSA exactly the same as a flex-spending account – treating it like there was no rollover and having a flat balance year to year -- and illustrating the differences between an HSA and an FSA should be included in communication efforts.
“I guess they have two letters in common, but other than that, there’s several differences,” he said, adding that it was providers’ responsibility to “reverse the tide” on FSA thinking by tailoring the HSA advances to specific employees: “Personalize the message as best you can, put a persona around it.”
The average cost of all future medical needs for a fresh retiree is some $240,000, Triplett said, “something that quite a few even financial planners overlook.”
“And that’s for people who are 65 today, so think about the person who is 40 today, what kind of expenses he or she is going to be faced with in retirement.”
The room, which included a first-time employer hoping to add HSAs as a benefit for his workers and an HR exec who said she struggles with getting the most out of her own plan, was asked to participate by coming up with pitches for a few hypothetical wage-earners, finding ways of marketing psychologically.
A young, healthy employee with low health costs, for example, could be told about the tremendous edge in interest accumulation (“This is something that we just can’t emphasize enough,” Benz said) that comes with starting young and saving for the days when pretty much everyone racks up medial costs. One provider also suggested that to such workers she makes the family pitch: saving not just for not-yet-existent problems, but for not-yet-existent people.
On the other side of the spectrum, an older worker could be informed of catch-up contributions and available transfers to beneficiaries.
When given the hypothetical scenario of an employee with a chronic condition who needs a large amount of health care and asked what the proper message for them might be, one woman shouted out “choose the PTO.”
Benz said knowing one’s audience, in this case one’s workforce, is crucial to getting through to them.
“Who is in your plan? How are they using their account? How are they using their health plan, and so forth,” she said. “Then we can look at the behaviors we want to change and be very, very focused on getting people to get the most out of their plans.”