HRA vs HSA Comparison
Health Reimbursement Account
A health care plan that gets employees thinking more and spending less
Facing rapidly escalating costs, employers are looking for ways to get their employees more engaged in their health care spending. Health Reimbursement Account (HRA) provides a viable solution. Equipped with the HRA, employers encourage member engagement to lower overall benefit costs.
How does the HRA work?
An HRA consists of the following components:
- Health Reimbursement Account - Employer contributes a predetermined amount to each member's account annually. The member may use the funds in the HRA to pay for medical care; covered expenses are paid from the HRA at 100 percent (or percentage amount determined by employer) until the HRA balance is exhausted.
- Employee out-of-pocket or FSA - Once the funds are exhausted in the HRA, the member is responsible for the remaining deductible. The member must satisfy the deductible each year before the medical plan pays benefits; the deductible can be paid with FSA funds, if available.
- Medical Plan - Traditional medical plan benefits are payable after the member satisfies the deductible; coinsurance and breakpoint out-of-pocket maximum levels are available.
- Controls health plan costs by making employees accountable for their decisions, purchases and behaviors.
- Controls rising employee out-of-pocket expenses without restricting coverage.
- Adds an affordable health care program as part of employee's overall compensation package.
- Members are eligible for first-dollar benefits and can manage money in their accounts effectively.
- Offers members more personal choice and flexibility in their health care purchases and decisions.
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Health Savings Account
Simple, cost-effective healthcare plans that offer real cost savings
In today's system, consumers of healthcare services are unaware of the true costs they incur due to low deductibles and copay amounts. Casual utilization has driven up claims and premium levels. As costs for healthcare and healthcare coverage continue to increase, employers and employees alike are looking for money-saving alternatives to traditional plans. Health Savings Account (HSA) plans provide an effective solution.
The idea behind an HSA is simple. Individuals, not the government and not managed care companies, are empowered to make healthcare decisions and control how their dollars are spent. HSAs reward careful consumers of healthcare with funds they own that earn interest for them. With traditional plans, an employee who spent fewer healthcare dollars did not receive any savings. With an HSA plan, employees who use fewer and less costly services keep the money they save through the HSA's rollover provision. This built-in financial incentive provides a significant cost-savings opportunity for both employers and employees. Employees spend more carefully when purchasing healthcare services because unused amounts in the HSA rollover to subsequent years.
There are two complementary components of these plans:
- A High Deductible Health Plan (HDHP)
- A Health Savings Account (HSA)
Here's how it works:
- The employer purchases an HDHP to provide protection from large medical bills.
- An HSA is established for each covered employee to pay for qualified medical expenses. HSA funds can be used for expenses that apply toward the deductible.
- Employees and/or employers make pretax contributions to the HSA.
- Withdrawals from the HSA are tax free for qualified medical expenses.
- Employees own and control the money in the HSA. Careful spending is rewarded with money that accumulates and grows.
What is an HDHP?
An HDHP is a health plan that has a minimum annual deductible of $1,000 for individuals and $2,000 for families. The maximum in-network out-of-pocket limits, including deductible amounts, are $5,000 for individuals and $10,000 for families. The employer designs the plan by selecting the appropriate benefit level, which creates a significant premium savings over traditional plans. The HDHP protects individuals from the financial impact of large medical bills, while the premium savings can be used to help fund the employee's HSA.
What is an HSA?
An HSA is a tax-favored trust account established for the purpose of paying qualified medical expenses as defined in the Internal Revenue Code. The employer, eligible individuals, or both can make contributions. The maximum annual HSA contribution is the lesser of 100% of the annual HDHP deductible amount or $2,600 for an individual and $5,150 for family coverage in 2004.
HSAs offer triple tax advantages:
- Tax-deductible contributions for employers and employees.
- Tax-deferred interest earnings.
- Tax-free withdrawals for qualified medical expenses.
Funds in an HSA belong to the individual and unused amounts can be carried over indefinitely from year to year. Accounts are portable when an employee changes jobs.
The HSA pays the initial annual qualified medical expenses that aren't covered by the health plan. Once the deductible is met, the HDHP covers additional medical expenses as defined in the policy.
For an HSA vs. HRA vs. FSA Comparison, CLICK HERE.
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