Demystifying Employee Benefits and CDH Accounts
With Open Enrollment season upon us, employers are tasked with answering, “Which benefit plan is the best fit for our staff and healthcare plan?” In an industry that uses so much jargon, and ever-changing acronyms, it’s no wonder employers are left scratching their heads when faced with making this decision. A good starting place in understanding these benefits is knowing the key differences between them, and removing the mystery to make the best decision for their business.
Flexible Spending Accounts (FSA):
This account is called a “spending” account because it’s designed for individuals who want to use the money in their pre-tax account to pay for current medical expenses. The entire annual election is available on the first day of the plan year. So, if employees anticipate spending most of their healthcare dollars at the beginning of the year the money will be there for them. Employers may allow participants to carry over up to $500 of Healthcare FSA balances remaining at the end of the plan year. Or, employers can offer a 2 ½ month grace period at the end of the plan year. Unlike an HSA, if they don’t spend their FSA on current healthcare expenses, employees forfeit the FSA balance. The IRS determines the annual maximum amount employees can contribute to the FSA. Expenses must be incurred during the Plan Year. If an employee is terminated but still has funds in their FSA account, they have the option to continue using those funds through COBRA by paying a monthly premium on a post-tax basis.
Health Savings Accounts (HSA):
Recently, HSAs have become the darling of the benefits world. With the rise of high deductible plans, this is a helpful benefit for employers to offer their employees. These are called a “savings” account for good reason. Participants can spend their HSA during the current year or save it for the future. They can even save their HSA to pay medical expenses when they retire. Think of this account as a “Medical IRA.” Funds in employees’ HSAs are available only as they are deposited into a participant’s account. So, if they think they might incur most of their expenses early in the year, the money may not be available when they need it. Any money left in a HSA belongs to the participant and rolls forward from year to year. These accounts are portable. The balance in the HSA is the participant’s to keep, even if they terminate employment or retire. Participants have an option to save the money in an interest-bearing FDIC insured account or invest it in securities or mutual funds. The IRS sets the annual maximum amount participants can contribute to the HSA. An additional $1,000 contribution beyond the yearly indexed limit is allowed if participants are over 55 years old. If they elect the HSA, employers may also allow employees to contribute to a Limited Flexible Spending Account (LFSA). This account is limited because they can only use it to pay dental and vision expenses that are not covered by another plan. If medical expenses exceed the HSA limit, the LFSA is there help employees save even more on those expenses. Or, they can choose to save their HSA and use the LFSA to pay dental and vision expenses.
Health Reimbursement Account (HRA):
HRAs allow an employer to repay the unreimbursed medical expenses of employees along with an option to roll unused funds forward. Similar to HSA funding, only a portion of the HRA limit is added to each account once per pay period. This is a nice feature for employers because it mitigates surprises and any large hits to their operating account. Employees may request reimbursement for medical expenses at the time service is rendered, accumulate them for reimbursement in the future, or save funds in the HRA for retiree health benefits. Services for eligible expenses must be incurred while the employee is covered by the HRA. Because funds may be allowed to accumulate from year to year, the employee decides when and how to best spend his or her medical benefit dollars. So what makes an HRA different from the other plans? The IRS allows the carryover of unused amounts to later years to reimburse employees for the purchase of health insurance. Also, HRAs may allow former employees, including retirees, continued access to unused dollars in their account. These accounts are fully funded by employers, but enable employees to have more choice over their healthcare coverage.
Commuter Benefit Accounts (Transit and Parking):
Many employers that are located in a metropolitan area offer their employees Commuter Benefits. While these types of accounts are not medical in nature, they are a vehicle (no pun intended!) for employees to save on taxes while they commute to work, or park at or near work. The Transit accounts are meant to be used for mass transit only, such as a bus or train. While Uber and Lyft have revolutionized how many people travel, individual rides are not permitted under Section 123. The good news is that UberPool and Lyft Line are considered eligible expenses because these are carpools. Oftentimes, ride shares are a less expense way to commute, and coupling that savings with the pre-tax benefit sets commuters up for a Win-Win!
We have discussed the key differences between the plans, but what are the similarities? These accounts are tax free! Employees do not pay payroll taxes on contributions to the FSA and HSA plans. With an HRA, contributions are not included in an employee’s salary. The employee does not pay taxes on these employer contributions.
Our Benefit Comparison chart below helps to clearly outline the differences and similarities between each plan.
Employees aren’t the only beneficiaries of these plans. The rising cost of healthcare is a concern for most employers. With the addition of any of these plans, employers can enhance their benefit package while achieving their corporate goals and controlling benefit costs. Additionally, these plans help to limit future increases in plan costs.
Employers' insurance costs can be lowered by coordinating changes to their health plans with the installation of pre-tax accounts. When employees set aside pre-tax payroll deductions, employers’ contributions to 401(k), pensions, and worker’s comp may also be reduced since they are based on lower taxable salaries. Employers will save approximately 8% on every dollar employees set aside from their paychecks to budget for pre-tax accounts. Administrative costs are tax deductible and can be paid by employers or employees. Fees can be collected by pre-tax deductions from the employees' pre-tax accounts.