As 2020 rapidly winds down, it’s safe to assume that Human Resources professionals are preparing to roll out their 2021 benefits lineups to nervous employees. Health care costs continue to rise every year which can make benefits season stressful for employers and employees alike, as both groups are trying to budget for the coming year.
When it comes to health care expenses, it seems the only way is up. In fact, the cost of health care has been trending upward for the last several decades. In 1960, health care spending in the U.S. was just 5% of our Gross Domestic Product (GDP). It rose to 13% in 2000, 17% in 2010, and 18% in 2018. According to the Centers for Medicare and Medicaid Services (CMS), the U.S. spent $3.6 trillion on health care in 2018, and costs are projected to reach $6.2 trillion, or 19.7% of GDP, by the year 2028.1 It’s important to note that these forecasted figures do not take into consideration the COVID-19 pandemic, an ongoing health crisis with a financial impact that is not yet fully known. So, what can be done to meet the challenge of rising medical expenses? Rest assured, there are options available to employers that are looking for ways to contain costs for themselves and for their employees.
Consumer-driven health plans, or CDHP
When we speak of consumer-driven health plans, typically we are talking about Health Reimbursement Arrangements (HRA), Health Savings Accounts (HSA), and even Flexible Spending Accounts (FSA). These plans allow employees to access funds to cover higher cost-sharing provisions in exchange for lower monthly premiums. With employees being more engaged in the cost of health care services, they become better consumers. They may be more inclined to consider the necessity of higher-cost health care in certain situations, e.g. going to an urgent care facility rather than the hospital emergency room. Further, this greater insight into how health care dollars are spent may also persuade them to make positive behavior changes in their lifestyles, such as quitting smoking or exercising more regularly—possibly leading to significant reductions in health plan spending year over year. This is a win/win for both employer and employee. Below is a high-level comparison of the three types of consumer-driven plans.
|Health Care FSA||HRA||HSA|
|What is it?||An account to help employees pay for eligible medical expenses tax-free.||An account to help employees pay for eligible medical expenses tax-free.||A personal bank account to help employees save and pay for qualified medical expenses tax-free.|
|How do you get it?||Enrollment is through the employer. There is no need to enroll in a health plan.||The HRA is usually connected to a health plan. If offered, enrollment is automatic when signing up for the health plan.||Requires enrollment in a high-deductible health plan that meets a deductible amount set by the Internal Revenue Service (IRS).|
|Who contributes to it?||The employee. The employer can also contribute if they choose to.||The employer. Employee contributions are not permitted.||The employee, their family, the employer, and anyone else that chooses to.|
|Can I keep the money if I leave my job?||No. The employer keeps the money.||This depends upon plan setup. If the plan has a forfeiture clause, the funds will go back to the employer if the participant leaves. If there is no forfeiture requirement, the participant can retire or separate from service and keep using their HRA funds until they are gone.||Yes. The employee owns the account.|
|Do I have to pay taxes on the money?||No||No||No|
|What can I pay for with it?||Medical expenses that are determined by the IRS and the employer. This includes dental, vision, and many other health care services and supplies as listed under Section 213(d) of the Internal Revenue Code.||Medical expenses that are determined by the IRS and the employer. The employer may only allow the HRA to pay for services covered by your health plan. Some HRAs can be used to pay for dental, vision, and other services/supplies listed under Section 213(d) of the Internal Revenue Code.||Qualified medical expenses, including services covered by a health plan as well as expenses listed under Section 213(d) of the Internal Revenue Code.|
There are many similarities between the three types of plans, but there are also some distinct differences, particularly in expense eligibility, participation eligibility, design flexibility, and what becomes of unused funds. While HRAs permit reimbursement for health insurance premiums, HSAs and FSAs generally do not. FSAs and HRAs are open to all participants and retirees but HSAs must meet certain IRS-defined eligibility requirements—in addition to enrollment in a high-deductible health plan. And finally, unused FSA funds, and unused funds in HRAs that have a forfeiture clause, will revert to the employer, but HSA funds are completely portable, meaning the employer cannot benefit from unused funds if an employee leaves the company. For more information on CDHP similarities and differences, please click here.
While health insurance premiums will continue to rise, employers have options to potentially reduce escalating costs while still providing a valuable benefit to their employees and encouraging employees to become more invested in their own health care. If you’d like to learn how FSAs and HRAs can help you achieve your financial goals, contact us today using the form on the right side of this page!