Choosing the right
Nearly half of the U.S. population receives health insurance from their employer, and every year workers decide on what employer-provided plan is the optimal fit. They find themselves weighing multiple factors, like lower premiums for higher deductibles and a limited range of in-network providers, or higher premiums for lower deductibles and expansive access. What can be especially daunting is choosing the right accompanying health benefits accounts, which can seem like a stream of indecipherable acronyms.
"Employees should do their homework and understand the different plans in order to make a decision regarding which is the right fit for them," says Becky Seefeldt, vice president of strategy at Benefit Resource, a pre-tax benefit accounts provider. "First and foremost, employees need to understand the basics of how each plan works."
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The three main types of pre-tax health plan accounts are flexible spending accounts, health savings accounts and health reimbursement accounts. FSAs, HSAs and HRAs can be broken down into subsects, namely limited FSAs and HRA Vebas. Notably, low-deductible plans are paired with FSAs, while high-deductible plans come with either HSAs or HRAs. Regardless, every account is meant to help employees have savings for out-of-pocket healthcare costs.
So, which one should employees choose? It depends on their financial and healthcare needs. EBN spoke with Seefeldt to gain more insight into pre-tax health accounts.
What are the differences between FSAs, limited purpose FSAs, HRAs, and HRA Vebas?
Medical FSAs allow employees to pay for certain medical and dependent care expenses through pre-tax payroll deductions, which provide up to 40% tax savings for employees and 7.65% savings for employers.
The key difference between a medical FSA and a limited FSA are the expenses covered. A limited FSA is used to pay for vision and dental expenses that are not covered by insurance. While a medical FSA can be used to pay for your out-of-pocket expenses related to medical care, dental care and vision, a Limited FSA can only be used to pay for your out-of-pocket expenses related to dental and vision.
While HSAs and HRAs are sometimes used interchangeably, the biggest differences come down to who owns the account and who sets the rules for it. With an HSA, the employee owns the account. While funds can be deposited by both the employer and the employee, once money is deposited to the HSA it is owned by the employee, even if they change employment. It also means the employee is responsible for reporting the funds on their taxes and saving receipts to show they spent the funds on eligible expenses.
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An HRA is an employer-funded account designed to assist employees in paying for certain out-of-pocket medical expenses. HRAs offer flexible plan designs for an employer to meet a variety of needs. With the passage of Health Care Reform in 2010 [otherwise known as the Affordable Care Act], HRAs must generally be provided in conjunction with a major medical plan and are often offered in conjunction with high-deductible, low-premium health insurance plans for total savings in health care costs.
An HRA Voluntary Employee Benefit Account, or VEBA, gives employers the power to provide employees with savings at the right time [since they place contributions in a trust on the employee's behalf]. With diverse plan design options, a VEBA is a perfect solution for employers interested in protecting employees from rising costs while controlling their own expenses.
What factors should employees consider when deciding between accounts?
Before selecting an FSA, employees should decide how much they want to contribute. They should also keep in mind that FSA funds left in the account at the end of the year generally don't carry over to the next year. Although, employers may also offer a grace period to allow a little extra time to spend the unused funds from the previous year.
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When it comes to both FSAs and Limited FSAs, accessibility is key. FSAs often come with a debit card allowing easy payment for eligible expenses — instead of waiting to be reimbursed for out-of-pocket costs. Employees should see if their FSA option comes with a debit card or similar option. And when it comes time to use FSA funds, employees should know what's eligible and what's not. If there are certain expenses they are looking to get covered, employees should verify their eligibility prior to electing into an FSA.
With HSAs, you have the freedom to invest the funds for a potentially greater return. Most of the rules regarding an HSA are set by the IRS. With an HRA, the employer is in the driver seat. It is solely funded by the employer. Additionally, while there are some basic rules outlined by the IRS, employers set many of the rules regarding how it is used, what it can be used for, and what happens to the funds at the end of the plan year or upon termination. Since these are employer-funded, HRA's are basically "free money" for medical expenses.
In addition to a versatile plan design and compatibility with other tax-free plans, an HRA VEBA can save employees up to 30% on eligible items like deductibles, co-pays and prescriptions while they work and even once they retire.
What are common mistakes workers make when choosing a health plan?
Underfunding accounts is one of the most common mistakes workers make when choosing a health plan. It's tempting to go with a lower premium and put less money into an account, but this can end up costing more in the long run. If employees have to pay for medical expenses out-of-pocket, they may find themselves wiping out their savings.
Remember: FSAs don't roll over. When choosing an FSA, employees often assume that any unused funds will automatically roll over into the next year. However, this is not the case. FSAs are use-it-or-lose-it accounts, which means that any funds not used by the end of the plan year are forfeited. As a result, workers need to be careful not to over-contribute to their FSAs.
Another common mistake workers make is failing to compare plans before enrolling in one. The benefits employers offer can be much more than just medical, dental and retirement coverage. Companies might provide employees with reimbursement for the vet bills of pets or financial assistance for continuing professional development. There are a variety of plans available, and it's important to choose the one that best meets your needs. By taking the time to compare plans, workers can be sure they're enrolling in the best possible option for their needs.
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Finally, some workers make the mistake of assuming that their health insurance will cover all of their medical expenses. However, this is often not the case. Health plans typically have deductibles and copayments that must be met before coverage kicks in. As a result, it's important for workers to understand their plan's coverage rules before assuming that all of their medical costs will be covered.
Which plan would you recommend to someone who is just entering the workforce? Should they look beyond health plan accounts?
One option is an FSA, which can help to cover the costs of a variety of expenses from medical to child care. Another option is a commuter benefits plan, which can help employees that commute to and from work save on transportation costs. Specialty accounts or lifestyle accounts can be customized for a wide variety of expenses. These accounts are created by employers and can be a personalized way to help support employees financially. These are the 'fun accounts' that employees find most appealing and usually the most helpful. Ultimately, the best employee benefits plan for an entry-level employee will depend on their individual needs and preferences.
