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In the race between all types of consumer-directed health plans it looks like Health Savings Accounts (HSAs) are becoming a real contender. Since first making its appearance in 2004 – HSAs were at first impossible to set up because the qualified high-deductible health plan (HDHP) described by the Internal Revenue Service (IRS) did not exist. Secondly, employers did not know they could offer health flexible spending accounts (HFSAs) and health reimbursement arrangements (HRAs) along with an HSA. Depending on employers' goals and objectives, they may desire to offer an HFSA plan or a Health Reimbursement Arrangement (HRA). This article will answer the question: How can an employer offer an HSA, a Health FSA, and an HRA program and still comply with every law surrounding these benefits? As just a little background, HSAs are individually-owned health care payment accounts that allow the participant to contribute untaxed dollars. Interest or dividends accumulate tax-free; and when an individual pays for qualified medical expenses, there will be no additional tax consequences. In order to have an HSA, individuals must be covered by a qualified HDHP. The HDHP must satisfy minimum deductible amounts with certain out-of-pocket maximums. Account holders may not be covered by any other insurance plan that is not an HDHP or that covers benefits provided by the HDHP. But participants may obtain narrowly-defined "permitted insurance" or "permitted coverage" products, such as policies that provide dental, vision, accident, disability and long-term care benefits. The HDHP, for non-grandfathered plans, also provide "preventive care" reimbursements that are below the minimum deductible amount or without a deductible. This is a discussion of "other" insurance coverage. Specifically – health coverage provided through a Section 125 HFSA or an HRA and Limited-Purpose HFSAs and HRAs, Suspended HRAs, Post-Deductible HFSAs and HRAs, and Retirement HRAs. Limited-Purpose HFSA or HRA In this program the HFSA and the HRA are limited to payment of only permitted coverage items like vision and dental expenses until the statutory minimum annual deductible is met. The limited-purpose HRA could also compensate for permitted insurance plans that cover a specific disease or illness or that provides a fixed amount per day of hospitalization. This range of benefits does not breach the "no other insurance" rule of HSAs. It should also be noted that the limited-purpose programs could pay for preventive care before the statutory minimum annual deductible is satisfied. The definition of preventive care was described in IRS Notice 2004-23. Suspended HRA A suspended HRA is an employer-funded HRA that pays all qualified health care expenses for eligible employees. For an otherwise HSA-eligible employee, an election is made before the beginning of the HRA coverage period to forgo, or suspend, all payments from the plan that are not for permitted coverage, permitted insurance or preventive care expenses. Thus, barring reimbursement at any time of otherwise eligible expenses from the HRA and retaining entitlement to make tax-free contributions to the HSA. The employer would continue to "fund" this employee's HRA account although the employee has elected to suspend full usage of the arrangement. When the employee ends the suspension period, they would no longer be eligible to make HSA contributions, because they are free to receive reimbursement of all health care expenses from the HRA. Post-Deductible HFSA or HRA With these benefits, the HFSA and HRA are also considered to be high-deductible insurance products. Remember the rule about no other insurance coverage? These HFSA/HRA plans won't kick off until after the minimum deductible is met. Participant reimbursement from the HFSA or HRA doesn't have to wait until the HDHP's deductible amount is met, but the "minimum" deductible standard must In addition, although the deductibles of the HDHP and the other coverage may be satisfied in-dependently by separate expenses, no benefits may be paid before the minimum annual deductible is met, which is $1,200 for single coverage and $2,400 for family coverage in 2011. Retirement HRA The retirement HRA can accumulate funds during an employee's working years and make those dollars available to the individual upon retirement. It may not reimburse any health care expenses, except for permitted coverage, permitted insurance, and preventive care expenses during an individual's period of employment. When the retirement HRA begins to make reimbursements, the participant is ineligible to make further contributions to their HSA. Mix and Match Combinations of the above plans can also work. For instance, an employee could be covered by a limited-purpose HFSA and a retirement HRA and still be eligible to make contributions to an individual HSA arrangement. Yes – you can have it all. Employers sometimes don't understand that they can and should have a general-purpose HFSA along with a limited-purpose HFSA and an HSA. Why would they want to do that? Some employees simply don't want to establish and maintain an HSA. They are familiar with how the HFSA works – it pays their large expenses even before they have made all their contributions for the year, unlike most Health Savings Accounts, which generally limit distributions to amounts already accumulated. There are also extra tax forms to complete. So make sure your employers include the full range of benefits in their cafeteria plan, including a general-purpose HFSA and dependent care assistance account. Contributions vs. Disbursements Don't confuse being "eligible to make contributions" to an HSA with "eligible to receive payments" from the HSA. The HSA can pay for the qualified medical expenses of the account holder and his or her spouse and dependents even though the account holder is no longer eligible to make contributions to the HSA. Another note – the spouse and dependents do not need to be covered by the underlying HDHP in order to have their health care expenses reimbursed from the HSA. Employee Education Employee education is a must when blending benefits with so many special rules. Start with the
basic information about the employer's plans, and try to keep educational materials simple and to
the point.
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