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Stacking HSAs, HRAs and FSAs

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Thanks in part to the presidential campaign, the profile of the health savings account has risen considerably since enabling legislation was first included in the Medicare bill in late 2003.

Even before campaign season heated up, agents and brokers saw interest in the HSA market growing as banks and carriers announced HSA solutions throughout the year.

Once Treasury officials cleared up uncertainties over how HSAs would work, HSAs emerged as part of a “back to the future” trend toward traditional-type health plans, which was increasing employees “skin in the game.” This led some benefits brokers to conclude that HSAs could accelerate the revolution toward consumer-driven health plans, or CDHPs.

Since HSAs can be funded by employees and/or employers, some employers have expressed interest in making modest “seed” contributions or matching funds for the contributions the employees make. By doing so, employers can share some of the premium savings gained by moving to high-deductible health plans while encouraging employees to choose the HDHP/HSA option. However, many employers are reluctant to contribute to HSAs at all because theyll lose all control over the money once it has been deposited in the employees account.

For employees, the HSA is an attractive, tax-favored savings vehicle for future health care needs. But like all good things there is a limit. With HSAs, its the amount of money that can be contributed each year. Fortunately, there are other solutions for both employers and employees. Benefits brokers interested in marketing HSAs might suggest a “stacking” arrangement with health reimbursement arrangement and flexible spending account funds complementing one another alongside an HSA.

The 3 Accounts

The new kid on the block, the HSA, can be used for current spending, but it is ideally suited to serve as a savings vehicle for future health care needs. HSAs are employee-owned, flexible and portable, and they can be placed in investments with earnings accumulating tax-free.

FSAs, which are fairly well known to the industry, typically are employee-funded on a pre-tax basis. Funds can be used for qualified out-of-pocket health care expenses. Although subject to the “use it or lose it” rule, FSAs are ideal for employees who want to fund predictable, current health care expenses

HRAs lie somewhere in between the other 2. Funded only by employers, they can be used for current expenses or (if the employer chooses) leftover funds can be carried over to future plan years. Unlike HSAs, employer-funded HRAs can have restrictions placed on their funds by employers; portability is limited; and the funds are notional, rather than fully funded on day one. As a result, HRAs have emerged as a better funding choice for employers than HSAs.

How “Stacking” Works

For many employers, therefore, the winning combination may be using an FSA and/or an HRA with an HSA. How might this work?

Lets start with the FSA. Even with the “use it or lose it” rule, it still makes sense for many employees to fund one alongside an HSA. Vision and dental expenses are fairly predictable and can be paid at any time without affecting the employees HSA status.

Stacked alongside the employees HSA and FSA, the HRA also can pay for vision and dental expenses at any time. In fact, the employer can limit HRA fund use to those categories alone. But, unlike FSA funds, unused HRA funds can be carried over to the following year. Typically, the employer will instruct the administrator to draw from the FSA first, then the HRA.

Finally, employees use the HSA, which accumulates interest or earnings tax-free, for their long-term health care expenses. So, the concept is fairly simple: FSAs for todays expenses and HRAs for todays or tomorrows. The employee gets the added benefit of tax-advantaged funding and is better able to use the HSA as it was intendedas a savings account.

Clearly, each fund has its unique strengths, increasing the odds that employers will want to combine (or stack) these accounts in the coming years. But, employers and their administrators need to coordinate these accounts carefully to take full advantage of their benefits and minimize risks.

Debit cards are a core component of a growing number of CDHP offerings and their convenience has been a big hit with employees who participate in FSAs and HRAs. To correctly coordinate all types of accounts, its essential to have a card with sophisticated capabilities that go well beyond those of a generic bank debit card.

A debit card must be able to administer multiple accounts on the same card and determine which one pays first (and the source from which to draw the actual cash funds), according to when and where the card is being used. It must also provide a high degree of electronic substantiation for FSA and HRA transactions, to maximize efficiency and employee convenience.

Brokers would do well to advise their clients to work with administrators who are familiar with advanced payment technology. In doing so, they can bring their clients flexible, thoughtful solutions that will address both rising health care costs and their causes.

Chris Byrd is executive vice president of Evolution Benefits Inc., Avon, Conn., which produces the Benny benefits debit card.

Reproduced from National Underwriter Edition, January 6, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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