Employee benefits account for nearly one-third of total employee compensation. That’s a big slice of the pie. So, if you make the decisions for your company’s benefits package, you want to clearly understand your options.
Health Savings Options
You may currently offer or are considering offering a health savings option, such as a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA) to your employees. Both are popular choices.
How do you choose the best fit for your company? Prior posts compared HSAs to Flexible Spending Accounts (FSAs) and HRAs. This post compares the HSA/FSA/HRA options from an employer’s perspective as the plan sponsor.
Let’s start by reviewing the holy trinity of employee benefits decision-making – Control – Cost – Savings.
Admit it. Who doesn’t want more control when it comes to spending their hard-earned dollars? Control can be a good thing. But, too much control can also backfire. Employers need to find the sweet spot between control, cost, and savings (which could be in the form of time).
HRAs deliver the most control to plan sponsors. Employers control what happens with HRA funds and have more flexibility over plan designs. The chart below compares various features of an employer’s health savings options.
What’s the Cost?
Costs take many shapes in employee benefits, such as premium, administration, and employee education costs.
- The HSA-qualified HDHP significantly reduces premium costs.
- Plan sponsors who self-fund are often drawn to HRAs that help manage costs through flexible plan design.
The administrative cost is where the rubber meets the road. Depending on company resources, employers may choose to outsource some or all the administration of the savings option(s) it selects.
Choosing the right vendor can have a huge influence on an employer’s decisions. Services may include eligibility screening, enrollment, payroll deductions, contributions management, or claims administration. Employers should make sure they have full disclosure of service fees to weigh their options.
Employee education is often a forgotten aspect of administration. However, the lack of education is costlier than the task itself. Employees don’t enroll in what they don’t understand. And if employers don’t understand the differences between the savings options, we guarantee that your employees won’t either.
As mentioned in previous posts, often times, employees confuse the HSA with the FSA. Some even think they are the same thing! So, don’t forget to factor in the cost of employee education and the benefit of a vendor who shines in that area.
Show Me the Savings
In addition to cost and time-saving administration, consider the tax advantages of an employer’s savings options.
Tax deductible/FICA/FUTA Savings
- Employer contributions are not subject to withholding from wages for income tax
- Those contributions are not subject to the Federal Insurance Contributions Act (FICA) or the Federal Unemployment Tax Act (FUTA)
IRS views contributions to an HSA through a cafeteria plan as employer contributions. We’ll discuss more about the effect of Section 125 cafeteria plans in a future post.
Can Employers Combine Savings Options?
Yes, employers can combine savings options with certain restrictions. Let’s look at how you can coordinate an HSA with an FSA and HRA.
Let’s say an employer offers an HDHP and a health FSA or an HRA. Employees use those accounts for getting reimbursed for qualified medical expenses. Usually, that means employees are not allowed to make contributions to an HSA. Bummer…EXCEPT (don’t you love exceptions?) when an employer offers a special kind of FSA or HRA. Check out the illustration below to see what makes the FSA or HRA special.
You can see there a lot of moving parts when selecting a savings option that is best for an employer and its employees. The level of control, cost, and savings you incur are major factors. Each business is unique. We recommend you review your options with your benefits broker, consultant or legal representative.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.