As a small business owner, you care about your employees, and want to help them prioritize their health and well-being. You also know that healthy, happy employees make for a healthier business and bottom line. But the cost of health coverage presents a challenge to both employers and employees.

One cost-effective solution to help offset the rising health care costs is a tax-advantaged savings account. There are several types of these accounts, and each comes with different rules and provisions, but the basic concept is an investment plan that enables employees to save for retirement or health care expenses using their pre-tax income. 

In the context of health care, there are three main types:

1. Health Savings Account (HSA)

Used only in conjunction with a High Deductible Health Plan (HDHP), employees deposit a specific amount of pre-tax money directly into their HSA through payroll deductions, then use those funds pay for qualified medical expenses. The IRS defines an HDHP for an individual as a plan with an out-of-pocket maximum of $6,550 and a minimum deductible of $1,300 for the year 2017.1 Employers can contribute to the account as well, and often do as a means to offset higher upfront costs for care.

  • Best for: Companies with many single and/or healthy employees with low healthcare use but who still want to maximize their savings while also reducing their taxable income.
  • Contribution limit? Yes. For 2017, the employee and/or employer combined maximum for an individual is $3,400; and $6,750 for a family.2

Unused funds: Since HSAs are employee-owned, any money remaining in the HSA carries into the next year. And if an employee takes a new job at a different company, his HSA funds will follow him.

2. Flexible Spending Account (FSA) 

Like an HSA, employees contribute pre-tax dollars for medical expenses to this account via payroll deductions. While an HSA can only be used with an HDHP, an FSA is compatible with any type of health plan offered through an employer.

  • Best for: Companies where the majority of your workers have regular and predictable healthcare needs.
  • Contribution limits? Yes. For 2017, the maximum contribution limit (deducted from the employee's salary) is $2,600. The employer can provide a matching contribution as long as it does not exceed $500.3
  • Unused funds: If an employee leaves the company, he forfeits any unused FSA funds.4 Otherwise, there are two ways employers can handle unused funds at year-end:
    • If the plan has a carryover feature, participants can roll over up to $500 to the next year, but will forfeit the excess amount of $500. 5
    • If a plan doesn’t have a carryover feature, an optional grace period through March 15 gives employees additional time to incur new expenses using prior-year FSA funds, but after that date all unspent funds are forfeited to the employer. 6

3. Health Reimbursement Arrangements (HRA) 

Health Reimbursement Arrangements, also known as "health reimbursement accounts" are a type of plan that reimburses employees for qualified medical expenses. HRA coverage may exist in addition to a standard group health plan, or alone. 7

Effective January 1, 2017, federal law established Qualified Small Employer HRAs — also known QSEHRAs — for companies with fewer than 50 full-time-equivalent employees who do not currently offer a group health plan to any employees.8 Only employers can contribute to the account, while employees can use the funds to cover premiums as well as healthcare expenses and receive pre-tax payroll reimbursement.

  • Best for: Companies seeking greater flexibility in the amount contributed for each employee or employers who want to recoup unused funds.
  • Contribution limits? Yes. Annual employer contributions for Small Business HRAs are capped at $4,950 for a single employee and $10,000 for an employee with a family.9
  • Unused funds: Portability and carry-over is at the discretion of the employer.10

Carefully considering how to offer health benefits enables employers to manage costs while still providing employees with benefits that satisfy their needs.

Sources:

  1. “IRS Announces 2017 Limits for HSAs and HDHPs;” Willis Towers Watson; 2016. www.towerswatson.com/en-US/Insights/Newsletters/Americas/insider/2016/05/irs-announces-2017-limits-for-hsas-and-hdhps , opens new window

  2. “IRS Announces 2017 Limits for HSAs and HDHPs;” Willis Towers Watson; 2016. www.towerswatson.com/en-US/Insights/Newsletters/Americas/insider/2016/05/irs-announces-2017-limits-for-hsas-and-hdhps , opens new window

  3. “HRAs and HSAs: An Overview;” Society for Human Resource Management. www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/HRAsandHSAsAnOverview.aspx , opens new window

  4. “2017 FSA Contribution Limits;” Society for Human Resource Management. www.shrm.org/resourcesandtools/hr-topics/benefits/pages/2017-fsa-contribution-limits.aspx , opens new window

  5. “More Employers Adopt an FSA Carryover Option;” Society for Human Resource Management; 2016. www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/FSA-carryover-use.aspx , opens new window

  6. “Annual FSA Grace Period Ends March 15;” Society for Human Resource Management; 2015.  www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/FSA-grace-period-reminder.aspx , opens new window

  7. “Health reimbursement Arrangement;” Centers for Medicare and Medicaid Services; 2016. www.cms.gov/Medicare/Coordination-of-Benefits-and-Recovery/Mandatory-Insurer-Reporting-For-Group-Health-Plans/GHP-Training-Material/Downloads/Health-Reimbursement-Arrangement-HRA.pdf , PDF opens new window

  8. “FSA, HRA, and HSA Comparison Chart;” Marsh Consulting Group; 2016. www.mcgteam.com/download_file.php?post=269 , opens new window

  9. “Small Business HRA;” Zane Benefits.  www.zanebenefits.com/small-business-hra , opens new window

  10. “FSA, HRA, and HSA Comparison Chart;” Marsh Consulting Group; 2016. www.mcgteam.com/download_file.php?post=269 , opens new window

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