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?