Contribution strategies: Reduce employer expense, increase take-home pay with FSA, HRA or HSA

From ChamberChoice and Smart Business Pittsburgh Magazine

A crucial health benefits decision an employer must make when it comes to an employee benefits program is the employee contribution strategy. 

“The contribution strategy should be carefully considered because employees rate their contribution (payroll deduction) more importantly than the benefit level and often more than the network providers,” says Ron Carmassi, sales executive at JRG Advisors. “A skilled, experienced benefits professional working in tandem with the company’s HR can save an employer time and money.”

Smart Business spoke with Carmassi about employee contribution strategies — the second of two articles on health insurance cost reduction (see previous article).

What types of employee contribution strategies should employers consider?
The consumer-driven health care approach and plan coupled with the correct contribution strategy can lower monthly premiums while engaging your employee population to manage more of their health care and make smarter decisions. The main accounts utilized in consumer-driven health plans are Health Savings Accounts (HSA), Flexible Spending Accounts (FSA) and Health Reimbursement Accounts (HRA). All three are designed to get employees more engaged with health care decisions.

How can an HSA drive down costs?
An HSA is only available to individuals enrolled in a qualified high-deductible health plan that is approved by and meets the standards set by the IRS. This type of account can reduce employer costs because, typically, high-deductible health plan premiums are lower than traditional plans.

Individuals, employees and employers can contribute to the account. The insured’s funds, deposited pre-tax, can be used to cover qualified medical expenses. Withdrawals for qualified expenses or postretirement care, contributions, and gains or investment are also tax-free.

The IRS will allow a single insured person to deposit up to $3,400 in 2017, and anyone enrolled with a spouse or dependent up to $6,750 in 2017.

How does an FSA differ?
These accounts are similar to HSAs in that an employee can use pre-tax dollars to pay for qualified medical expenses. There are even options to use the account for certain dependent care and transportation expenses.

But this account is employer-established and only funded by the employee or the employer. An employee may choose how much to deposit in the account pre-tax from their paycheck and what qualified items to use the money for.

For 2017, the maximum that may be deposited in an FSA account is $2,600 and only up to $500 may be carried over. So, consider what the FSA will be used for to avoid overfunding and losing money. These  accounts don’t offer investment options and don’t earn interest, but they do allow a person to use pre-tax dollars for medical and non-medical items and services. It is important to verify items approved by the
IRS for purchase with an FSA. 

What is an HRA? How does it work?
With HRAs, an employer selects a plan with a higher deductible and a lower monthly premium. This account is employer-funded and the savings generated by the lower premium can be used to reimburse the employee for some portion of the deductible and out-of-pocket costs. These reimbursements are tax deductible for the employer and tax-free to the employee. This type is owned by the employer and typically administered by an insurance company or a third party administrator.

There are more restrictions on HRAs due to the Affordable Care Act. There may be limits on how much the employer may contribute. When considering an HRA, employers should work closely with an experienced benefits advisor to be sure to remain in compliance.

How should employers choose between the three options?
These reimbursement options should be studied and reviewed carefully to determine which type is best to help reduce your employee benefit program costs without lessening benefits. By better managing benefit costs, your employee benefits package can have even greater depth and flexibility, while also promoting employee wellness and healthy lifestyle alternatives.

JRG Advisors is available to Chamber members on a consultative basis for health insurance as a benefit of Chamber membership and can be reached at 1-800-377-3539.