What’s Trending in Tax Preferred Health Accounts after ACA?

Sponsors continue to be interested in health benefit strategies that move away from “first-dollar/low deductible” PPO and indemnity options in favor of employee options that are more cost effective and carry lower payroll costs for employees. This is the noted trend on Consumer Driven Health Care Plans (CDHP).

In some cases, advisors are packaging a higher deductible/higher out of pocket core health plan with an associated reimbursement plan. These tax favored reimbursement plans may take the form of Flexible Spending Accounts, with limited or no employer contributions, or Health Savings Accounts (HSAs) if the core plan meets High Deductible Health Plan (HDHP) requirements, or Health Reimbursement Arrangements (HRA), funded exclusively by the employer. In some cases an employer may offer some or all of these tax favored plans, as dependent upon employee election from among options.

What are the differences?

Health Reimbursement Arrangements can be more tightly controlled by the employer sponsor. As a function of employer plan design, they:

  • May permit carryover of unused balances into the next plan year, or some, or nothing;
  • May allow for spend-down provisions (unused balances) should the employee terminate or lose plan eligibility;
  • Do not allow the employee to port balances to other HRA account service providers while active;
  • Do not allow access to HRA plan balances for other than plan stipulated qualifying expenses;
  • Do allow the employer to determine more narrow categories for reimbursement, such as for plan deductible only, or other stipulated expenses or plan out of pocket areas.

Health Savings Accounts are largely under the control of the participant. There is no employer plan, aside from an agreement to match or fund the accounts if the employer wishes. Once the employer makes contributions to the account, the employer cannot restrict:

  • Access to fund contributions, whether employee or employer, including cash distributions
  • Employer contributions are vested and ceded once contributed. They cannot be forfeited back to the sponsor for any reason, including loss of plan eligibility or termination of employment.
  • HSA accountholders can port their balances to one or more new providers as they may determine. (In doing so, they face the monthly account administration fees themselves; conversely, most employer sponsored HSA programs entail the sponsor picking up the costs of operating the account.
  • HSA plans are not ERISA plans; accountholders can save and re-invest their monies until retirement and beyond. At retirement age 65, accountholders can take cash distributions from their accounts and face no penalties beyond normal income tax. If account distributions are paid out using historic qualifying claims and receipts, no tax is ever paid. The employer is out of this prConclusion: New and more conventional design approaches for consumer driven health plans typically pair a HDHP with an employer sponsored HSA. The sponsor may or may not provide for employer contributions to the HSA.

Conclusion: New and more conventional design approaches for consumer driven health plans typically pair a HDHP with an employer sponsored HSA. The sponsor may or may not provide for employer contributions to the HSA.

We find that health care advisors in Western PA are favoring options that involve a core health plan with higher than prior deductibles and out of pocket exposure to the participant. However, this plan is then coupled (under specific ACA requirements) with (HRA) funded by the employer. Notably, the overall packaged costs of the combination are factored into required payroll share costs of the electing employee. Why use HRA? In many instances, these programs limit employer HRA contributions to annual deductibles; and unused accounts are not treated to carryover or spend-down provisions.

In other parts of the US, employers are adopting HDHPs and also offering HSA, in pair. Frequently, in moving away from prior programs with lower deductibles and cost sharing exposure, these employers offer to contribute to the Health Savings Accounts to some level.

 

 

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