Consumer-directed health funding accounts. They seem to be the wave of the future. More employers than ever are offering at least one of the three kinds of funding accounts: a health savings account (HSA), a health reimbursement arrangement (HRA) or a flexible spending account (FSA). And for good reason. These accounts are all designed to have certain advantages, for both you and your employees:
- More control over health care costs
- Tax savings
- Lower health care costs (consumer-directed health insurance plans are usually less expensive)
If they all have these advantages, which one do you choose? It’s important to first understand the key differences between the different types of funding accounts. Then, consider your business and your employees – and ask yourself some very important questions.
Five Key Questions
- How much (if anything) do you want to contribute?
You want to fund the account entirely: An HRA is funded entirely by the employer.
You do not want to contribute to the account: Although an FSA is owned by the employer, it is funded by your employee, and your contributions are optional, making this an ideal choice if you want to provide more value with your plan, but do not want to fund the account.
An HSA is owned by the employee, but can be funded by either you and/or your employee, making it another option if you don’t want to be solely responsible for all contributions.
- Are you going to offer a high deductible health plan?
Yes: An HSA must be paired with a high deductible insurance plan. So, if you want to offer an HSA, you have to offer a compatible plan.
No: HRAs and FSAs do not require a high deductible plan (though you may want to consider one anyway, as HRAS and FSAs are often paired with a high deductible plan to fund the gap between out-of-pocket costs and insurance coverage).
- How much control do you want to have over the account and how it is used? (alternately, how much control do you want your employees to have?)
You want full control: Only an employer can fund an HRA, decide how much to put in it, and which health care costs it can be used for. As a result, HRAs give you more control, but also require more administration. In fact, many businesses have their HRA handled by a third party.
An FSA is good for moderate control. You may choose to offer an FSA that covers health or dependent care, or both. If you offer a health FSA, you can select a general-purpose health FSA (for qualified out-of-pocket medical, prescription, dental, and vision expenses that are not covered under your health plan) or a limited-purpose FSA (which gives you the power to decide which services are reimbursable: medical, dental, vision, prescription or any combination of these options).
You want your employees to have control: With an HSA, your employee owns the account and chooses which eligible health care costs he wants to pay from it. This gives him more control. So, while you have the least amount of control over this type of account, it will also require less management on your part – which may be a plus, depending on your time and budget restraints.
- Does your business and/or industry have high turnover? This may seem like an odd question, but it’s an important consideration.
Yes, the potential for turnover is high: Because HRA funds do not belong to an employee, the employer retains any funds left in an HRA when an employee leaves the company. This is a particularly attractive feature for employers in industries like retail or fast food, with traditionally high turnover.
No, the potential for turnover is relatively low: HSAs allow employees to keep any unused funds for use in future years and to roll over those funds when they leave the company. If turnover is high, the money you invest could be gone, but if turnover is relatively low, this is less of a concern, making the HSA attractive.
- What is important to your employees? Consumer-directed health accounts have advantages for you, but they are also about creating a value proposition for your employees – so you can recruit and retain top talent. Consider your employee population when making this choice.
For example, one company’s employees might appreciate the portability of an HSA, while others might be interested in an HRA if you, as the employer, are more willing to make larger contributions on their behalf relative to potential out-of-pocket health care expenses (since they cannot take their account balances with them). Another example – a company with employees with young families may want to offer an FSA, which can help with child care.
The bottom line: know your employees, know your business, and your own priorities and constraints. When you consider these factors, you will be able to choose the funding account or accounts right for you. Still can’t decide? Use our consumer-directed health website, or check out some consumer-directed health videos.