For some companies the 2012 open enrollment decisions have already been made. Other employers may be on the fence about benefit offerings, don’t have a January start date, and/or have not even started to think about next year’s benefit changes.
In other words, there are still plenty of opportunities to consult with employers about their benefits. Again this year, the clever, snappy response is a consumer-directed health plan (CDHP). But just what is a CDHP?
The fact is, a CDHP is a broad category for many different plans—both health insurance and so-called side accounts. See my April 2011 column (“The Latest On Coordinating HSAs With FSAs And HRAs”), where I talk about the different side accounts that allow employees to save 25 to 40 percent on qualified expenses when they elect to pay those expenses with voluntary payroll deductions on a pretax basis or get additional health care benefits through an employer-funded account.
Side accounts generally consist of (1) a health flexible spending account (health FSA); (2) a health reimbursement arrangement (HRA); (3) a health savings account (HSA); and (4) additional voluntary products.
A CDHP does not start with a benefits program; it starts with preparation and philosophy. Yet, with all the available choices, how are employers supposed to decide what is best for their employees? As a consultant, conversations with your employer clients can bounce around so fast you think you’re inside a pinball machine.
Many times both good and bad ideas get tossed in the trash as an employer tries to decide where to spend his benefit dollars and just how to get the most bang for the buck. And, a savvy employer will realize that unless he actually does something to improve health status, he will be needing to retrench and revisit all available options each year in order to manage benefit costs.
Sometimes a decision is simply by default. Employers might understand only one type of plan, they might guess at what might work, or they may even stick with what they did last year. What employers need are clear-cut decision-making tools that bring clarity to their benefits package and keep them on point and focused on the task at hand.
The option that is right for your employer clients and their employees depends on several factors. Ask the following questions to determine which CDHP side account is appropriate for their company’s goals and objectives:
1. Do you want to allocate a portion of the premiums you save by offering a high-deductible health plan into an account for each employee?
Yes means it’s time to talk about an HSA, HRA or health FSA. Employers may contribute employer dollars to any of these accounts.
No indicates a preference toward instituting an HSA or health FSA. The HRA utilizes only employer dollars, whereas the HSA and FSA plans can be funded with employee pretax salary redirection.
2. If you are contributing to a plan, do you want the money you contribute to the side account to be used only for qualified medical expenses?
Yes puts the HSA out of play. Contributions to an HSA can be withdrawn by a participant for any purpose, but there would also be taxes and a 10 percent penalty on funds withdrawn for non-medical reasons. Some employers simply do not want their employer dollars to be used for anything other than eligible medical expenses.
Claims paid from an HRA or a health FSA are adjudicated. That means that someone is looking at every claim to ensure that reimbursements from the plan are for qualified medical expenses. This gives an employer the satisfaction of knowing that the dollars are actually being used for the intended purpose.
No keeps the door open for a discussion of setting up HSAs for participants, in addition to an HRA and an FSA.
3. Do you want your employees to be able to roll over unused dollars from year to year?
Yes signifies a willingness to allow participants to build wealth in an account that may be used in the future. And, to different extents, all three accounts can have a rollover feature.
The HSA, of course, belongs to each participant and accumulated funds roll forward from year to year.
The HRA may allow participants to roll funds forward from one plan year to the next, and the employer may cap the amount that can accumulate in any participant’s account. Or, the employer does not have to allow for rollover of unused funds.
The health FSA may permit participants a 2.5 month grace period in which to spend leftover funds from the previous plan year.
No illustrates that this employer would prefer an HRA plan that can be designed so that it does not accumulate funds for participants or an FSA where leftover funds are forfeited at the end of the plan year or grace period.
4. Do you want the annual limit of this account to be available to participants on the first day of the plan year?
Yes denotes a preferences toward a health FSA or an HRA that is designed to make funds immediately available. The HSA will pay out only what has been contributed to date. For participants who live on a tight budget, the HSA just isn’t the plan for them.
The HRA may be designed to make the annual election available to participants on the first day of the plan year or at different intervals (monthly or quarterly).
FSAs pay the entire amount of a medical claim up to the annual election amount, regardless of the amount of contributions to date. For the budget-minded participants, this plan allows them to pay medical expenses while contributing a set amount per pay period.
No implies a preference for employees to have an HSA or an employer-funded HRA that would make the annual election available on a periodic basis.
If an employer answers yes to most of these questions, then an HRA with a health FSA would fit seamlessly beside a high-deductible health plan. This type of consumer-directed health plan agenda combines the most sought after CDHP attributions for employers and their employees.
The HRA Edge
Why do many employers favor an HRA?
• Both an employee and employer can share in the financial responsibility of the high-deductible health plan.
• Health care awareness and ownership is promoted.
• A portion of the funds can be made available on the first day of the plan year by an employer who still retains control of employer dollars.
• The possibility of funds being used for non-medical expenses is eliminated.
• Employee education is less daunting because HRAs are less complicated than HSAs.
• No extra IRS forms need to be filled out by participants when filing their tax returns.
HRA Design Choices
How much should an employer allocate to an HRA for each employee during the plan year? The level of contributions can differ for those selecting single or family coverage. The health insurance plan deductible needs to be considered as well as how much responsibility will be placed on employees in determining the HRA plan limits.
Move on to assigning different levels of coverage to various health care costs. Health care expenses can be easily divided into four different areas: prescriptions; medical expenses subject to the deductible of the health plan; over-the-counter medicines (when prescribed) and supplies; and other Internal Revenue Service (IRS) medical, dental and vision fees, and health care products.
Each category of costs must be considered in order to decide whether to allow the expenses to be paid with employer dollars from the HRA or from an employee-funded health FSA. An employer can even decide which account pays first and which one kicks in second. For instance, the HRA could pay first for deductible charges, with the health FSA branded for more discretionary items such as LASIK eye surgery or orthodontia.
Unused employer HRA contributions expire at the end of the plan year unless a plan is designed to allow funds to roll forward. To encourage employees to plan ahead and budget wisely, an employer might designate a portion of the unused accumulated employer allocation (say 50 percent) to roll forward to the next year. However, there is no IRS requirement to roll forward any portion of the employer contribution that is not used. This is another decision for the employer.
How It All Stacks Up
Because each employee has unique needs and the employer and employees want to maximize savings, offering multiple or stacked health care accounts is a win-win for everyone.
For a practical CDHP design worksheet and an FSA HSA, HRA comparison chart, go to: www.takecarewageworks.com/ab/ab_hra.html.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
