When it comes to benefits, employees clearly place maximum value on health-care-related programs. In a recent survey by MetLife, employees rated health insurance, prescription drug coverage, and dental insurance as their top three must-have benefits, relegating a retirement savings plan to fourth place.
Beyond a broad health insurance plan, there are three types of health-care-related plans employers can offer –and contribute to – that will help employees manage their medical costs:
- Health Reimbursement Arrangements (HRA)
- Flexible Savings Accounts (FSA)
- Health Savings Accounts (HSA)
An HRA or FSA helps employees pay for current health care costs. Employers are in charge of funding an HRA.
For an FSA or HSA contributions to the accounts can be made by both employer and employee.
Here is a quick guide to the different types of accounts:
Health Reimbursement Accounts
There are three types of HRA accounts you can offer to employees.
Individual Coverage Health Reimbursement Arrangement (ICHRA)
If your firm does not currently offer a group health insurance plan, beginning in 2020, you can fund an (ICHRA) that gives an employee tax-free dollars they can use to purchase their own coverage and pay for out-of-pocket medical expenses, including dental and vision.
Employers are in charge of the size of your contribution and can vary the amount of the benefit for different types of employees (full time, part-time, non-salaried etc.) There is no limit on the size of an employer contribution; the business can deduct the cost of ICHRA contributions.
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
This is an option for firms with fewer than 50 employees. Employers must offer the same tax-free benefit to all employees, and the maximum annual contribution is $5,000 for individuals and $10,000 for employees with family health-insurance; the business can claim the contribution as a deduction. Employees may not use this type of HRA to pay for dental and vision coverage.
Expected Benefit Health Reimbursement Arrangement (EBHRA)
If you offer a health insurance plan, you can also fund an EBHRA to give employees tax-free dollars to pay their share of the plan premium, and dental and vision costs. The maximum contribution in 2020 is $1,800 per employee. The contribution is an eligible business deduction.
Flexible Spending Accounts (FSA)
An FSA is a benefit a business can provide that is funded fully by the employer or employee. An FSA can be used by an employee to cover qualified medical expenses, including dependent care. Employee contributions are made with pre-tax dollars that are deducted from their pay. In 2020, individuals can contribute up to $2,750. Most FSA plans have a “use it or lose it” feature: Money contributed during a calendar year into an FSA often can’t be rolled over into subsequent years.
Health Savings Accounts (HSA)
If your health insurance includes a high-deductible health plan (HDHP) you are likely able to offer a companion HSA account. Employees have the option of using money in an HSA account to pay for current medical costs, or to save the money with the intent to use it in retirement for health care costs.
Employers and employees can both contribute to an HSA, and both receive tax breaks on their contributions. The 2020 maximum HSA contribution is $3,550 for an individual and $7,100 for an employee with family health coverage. (Employees at least 55 can contribute an additional $1,000.)
An HSA can be used by an employee to pay for qualified medical expenses with tax-free dollars. A unique feature of an HSA —not available with an HRA or FSA — is that there is no “use it or lose it” rule. Employees can opt to save the money for future medical expenses, rather than tap the money to pay current out-of-pocket costs. As stated by MetLife, “being able to afford health care in retirement” was the most cited financial stress reported by employees. An HSA can be a valuable part of your employees’ retirement strategy.
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.