Does your company offer employees a health savings account (HSA), a flexible spending arrangement (FSA) or health reimbursement account (HRA)? These plans can help employees enjoy tax-free savings for health expenses they incur. Still, there are a few changes that you’ll want to pay attention to, in order to help employees take full advantage of the plans and their perks in the years ahead.
Starting in 2015, the amount an employee can withhold before taxes for a flexible spending arrangement is $2,550. The limit is per employee, so a family with two working spouses can both choose to contribute up to $2,550 to his or her FSA.1
FSAs are known for being a “use it or lose it” plan, but employers can now elect to allow $500 of unused FSA contributions to rollover to the immediately following year, while still allowing employees to contribute the pre-tax maximum of $2,550 for each plan year. The only catch is that employers must choose whether they will offer the $500 rollover or if they will offer employees a grace period to spend the funds. The employer can only offer one or the other.2
HRAs must be integrated with a non-HRA group health plan. This means employers can no longer offer active employees a stand-alone HRA or an HRA tied to an individual health plan that is not considered group coverage. Additionally, employees and former employees participating in the HRA may not be eligible for premium tax credits while enrolled in the plan, so they must be able to permanently opt-out of future HRA reimbursements at least annually. The only exception to these rules are retiree-only HRAs, which are exempt from the Affordable Care Act market reforms.3
For 2015, the annual limit for an individual with self-only coverage under a high deductible health plan (HDHP) is $3,350 and for an individual with family coverage it is $6,650. A HDHP is defined as having not less than $1,300 for individual coverage or $2,600 for family coverage and with annual out-of-pocket expenses (deductibles, copayments, and other amounts, but not premiums) not exceeding $6,450 for individual coverage or $12,900 for family coverage.4
There are a few unique differences between tax-free health accounts. Here are the basics:
Health savings account: An HSA can only be offered to individuals covered by a high deductible health plan (and with no other “first dollar” coverage). Contributions can be made by the employee and/or the employer, and unused funds can be rolled over each year. The funds belong to the employee – even if they are terminated or leave their employer.
26 percent of employees are not very or not at all knowledgeable about HSAs.5
Flexible spending arrangement: These accounts allow employees to be reimbursed for certain medical expenses. They are employee-paid, generally through voluntary salary reduction agreements. The funds can rollover, but with limitations.
22 percent of employees are not very or not at all knowledgeable about FSAs.5
Health reimbursement account: These accounts also reimburse employees tax free for qualified medical expenses, but unlike an FSA, HRAs must be funded solely by an employer. The dollars can rollover, but they can never be credited directly to the employee and belong to the employer if the employee is terminated or leaves their employer.
43 percent of employees are not very or not at all knowledgeable about HRAs.5
1 Internal Revenue Service (2014). Revenue Procedure 2014-61, accessed on April 6, 2015 from http://www.irs.gov/pub/irs-drop/rp-14-61.pdf.
2 United States Treasury Department (2013). Treasury modifies “use-or-lose” rule for health flexible spending arrangements. Accessed on Feb. 11, 2014, from http://www.treasury.gov/press-center/press-releases/Documents/103113FSA%20Fact%20Sheet.pdf.
3 Internal Revenue Service (2013). Internal Revenue Bulletin: 2013-40. Accessed on Feb. 11, 2014, from http://www.irs.gov/irb/2013-40_IRB/ar11.html.
4 Internal Revenue Service (2014). 26 CFR 601.602: Tax forms and instructions. Accessed May 18, 2015, from http://www.irs.gov/pub/irs-drop/rp-14-30.pdf.
5 2014 Aflac WorkForces Report conducted by Research Now on behalf of Aflac during January 2014.