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Tax Favored Health Plans Differences Between FSA, HSA, HRA and other Health Savings Accounts Flex-Pay Payroll Services * 723 Coliseum Drive, Suite 200.

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Presentation on theme: "Tax Favored Health Plans Differences Between FSA, HSA, HRA and other Health Savings Accounts Flex-Pay Payroll Services * 723 Coliseum Drive, Suite 200."— Presentation transcript:

1 Tax Favored Health Plans Differences Between FSA, HSA, HRA and other Health Savings Accounts Flex-Pay Payroll Services * 723 Coliseum Drive, Suite 200 * Winston-Salem, NC 27106 * * (800)

2 Why offer a tax favored health plan?

3 Types of Plans POP - Premium Only Plan HSA - Health Savings Accounts FSA - Flexible Spending Arrangements HRA – Health Reimbursement Arrangements Link to Publication 969 below: MSA – Medical Savings Accounts (Archer MSAs and Medicare Advantage MSAs) Handled like an individual IRA account

4 Consumer Driven Health Plan Theoretically, employers reduce health related expenses to the company including health insurance premiums, health related absences, and productivity through involving the employees in the decision making of choosing their plan and coverage. Each year, employees and employers are offered less coverage, higher deductibles, higher co-payments, more plan limitations and higher premiums from the insurance companies. With health savings accounts, employees can choose and pay for health care treatment that may not be covered under the employer provided insurance plan, improving their overall wellness. Health savings accounts also provide a method for the employee to fund the future costs of the higher deductible either with their own money or with EE and ER funds if the ER contributes.

5 Employee Benefits of All Plans Pretax deduction for employee contributions including income, Social Security and Medicare tax. Reimbursements or distributions from the accounts that are used to pay qualified medical expenses are not taxed. Refer to IRS Publication 502 for qualified expenses No taxes on interest or earnings on the assets of the account.

6 Employer Benefits of All Plans Tax savings on employee pretax deduction –Social Security, Medicare, FUTA, SUI. Employer contributions are tax free and are considered a business expense. These plans provide a relatively low cost way to offer a valuable employee benefit. The administrative costs and employer contributions may possibly be recouped through lower health insurance premiums and payroll tax savings.

7 Premium Only Plan Features (POP) Designated deductions are pretax, typically insurance premiums such as medical, dental, vision, etc. and HSA employee contributions. Low cost and easy to establish plan. No monthly fees to maintain plan. Saves employee and employer FICA taxes along with employer FUTA and SUI taxes. Requires a plan document.

8 Differences of Medical Savings Accounts Flexible Spending Account Health Savings Account Health Reimbursement Account

9 Features of HDHP’s Higher deductible than typical health plans. Minimum annual deductible: individual is $1,300, and family is $2,600. Maximum on the sum of the annual deductible and out of pocket expenses are: individual is $6,450, and family is $12,900. An HDHP may provide preventive care at no or lower deductible (annual physicals, routine pre-natal, well-child care, screening,etc.). Link to HSA limits: center/faqs/Taxes/Pages/Health-Savings-Accounts.aspx center/faqs/Taxes/Pages/Health-Savings-Accounts.aspx The amounts are subject to change every year.

10 Flexible Spending Arrangement Features (FSA) The employer has flexibility in the plan’s design. An FSA allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements (125 deductions). The employer may also contribute as a tax free fringe benefit. Requires a plan document. Does not require a HDHP.

11 FSA Benefits/Risks Employee contributions are tax free. Employer contributions are tax free. Withdrawals for qualified medical expenses are tax free. Employer Risk - employee can withdraw funds through a large medical expense reimbursement in advance of their contributions. Employee Risk – unspent funds are forfeited annually (plans may have a grace period) Carry over option up to $500 can rollover for one plan year to the next for FSA medical only.

12 FSA Plan design As of January 1, 2014, employers must offer a group health plan to establish a FSA. No HDHP or any type of specialized insurance plan is required. The IRS limit on medical FSA is $2,550 as of 2014. The IRS limit is subject to change from year to year due to cost of living adjustments. IRS limit on dependent care FSA $5,000. EE can not change election during the year unless there is a qualifying event.

13 FSA Types of Accounts Medical Expenses which typically covers deductibles, copayments, prescription copayments and over the counter medication if the doctor prescribed the OTC. Dependent Care which typically covers expenses to care for dependents while the employee is at work. Along with day care, this can also cover adult day care for senior citizen dependents. Limited Scope of expense reimbursement depending on the type of benefits offered. –Vision, dental, etc., but not health insurance

14 FSA W2 Reporting FSA employee or employer contributions are not required to be reported on the W2 except dependent care contributions in Box 10. The amounts can voluntarily be reported in box 14 for informational purposes. The employee isn’t required to report FSA contributions on their income tax return.

15 Health Savings Accounts (HSA) Features An HSA is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. A qualified trustee can be a bank, an insurance company, or anyone already approved by the IRS. Does not require a plan document. Began in 2003, which may indicate there will be future IRS changes, annually indexed by IRS.

16 Benefits of HSA Contributions by employer or by employee through cafeteria plan are excluded from income. (Exempt from income tax only if contributions made outside of 125.) Contributions carry over from year to year. Interest earned on the account is tax free. Distributions are tax free if used for qualified medical expenses. (Reference IRS Publication 502.) Portable – stays with employee, not employer owned.

17 How do Employees Qualify for HSA? The employee must be covered under a High Deductible Health Plan (HDHP). The employee cannot be enrolled in Medicare. The employee cannot be claimed as a dependent on someone else’s tax return. The employee cannot have any other health coverage other than the next slide.

18 HSA Other allowed coverage Specific disease or illness Fixed amount per day of hospitalization Accidents Disability Dental Vision Long-term care

19 HSA Contribution Limits Maximum contributions (total EE and ER): Individual $3,300 Family $6,550 –If the employee is 55 or older, an additional $1,000 can be contributed. Additional limits apply for partial year eligibility. Pub 969

20 HSA W2 Reporting Both the employee’s pretax contributions and the employer’s contributions must be reported in Box 12W of the employee’s W2 form. This information is required to be recorded on Form 8889 with the individual’s 1040.

21 Health Reimbursement Arrangements (HRA) Features HRA allows employees to be reimbursed for medical expenses. More flexible, does not require a HDHP. HRA must be funded solely be employer, no employee contributions allowed. Requires a plan document.

22 Benefits of an HRA Employer contributions are tax free. Withdrawals for qualified medical expenses are tax free. Reference IRS Publication 502. Unused amounts can be carried forward for reimbursements in later years. Not as flexible as an HSA since only employers are allowed to fund the account and employees cannot contribute pretax dollars to the account. Funds cannot be invested.

23 HRA Plan Design The design options provide limitless customization for employers. No IRS limit on Employer contributions. Funds stay with employer upon employee termination.

24 HRA W2 Reporting HRA employer contributions are not reported on the W2. The employee is not required to report HRA contributions on their 1040 return.

25 Benefit Comparison HSA FSA HRA Plan DocumentNoYes Summary Plan DescriptionYes Special health insurance policy requiredYes Employer contributionsOptional Required Employee contributionsOptional No IRS limit on contributions individual $3,300, family $6,550, plus $1,000 if 55+ $2,550 limit on medical and $5,000 for dependent care No Employee tax savingsContributions are tax free Claim reimbursements are tax free Employer tax savings Employment taxes, business expense Business expense Distributions for qualified expensesNot taxed Account prefunded by employerNoYesNo Roll unused dollars to next yearYes Debit CardYes Long term care premiums paid from accountYesNoYes Who owns accountEmployeeEmployer Account retained by employee at terminationYes No

26 More Comparisons HRA’s are considered to benefit employers more while HSA’s are considered more of a benefit to employees. HRA’s were created in 1954 and the rules are considered stable while HSA’s were created in 2003 and clarifications on the rules may still be pending. The employer has authority over how the funds are spent for HRA’s while the employee controls how funds are spent for HSA’s. Employers have the ability to exclude employees based on type, age, length of service, etc… with HRA’s while employers must make comparable contributions for all employees with HSA’s.

27 Reminders on Medical Savings Plans For FSA and HRA, coverage and reimbursement is allowed for a child under age 26 at the end of the year. For FSA, HSA and HRA, over the counter medicine is not eligible for reimbursement unless there is a prescription written for it. For HSA’s, distributions that are not used for qualified medical expenses are subject to taxation and a penalty if used before age 65.

28 Q & A Session Does anyone have any questions? How many companies have an FSA, HRA or an HSA? How does it work for you? How do the employees respond? Any tips or information that can be shared with others?

29 Links and Resources Link to the IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans: Link to the IRS Publication 502, Medical and Dental Expenses: Link to US Department of Treasury HAS Resource Center: Savings-Accounts.aspx Savings-Accounts.aspx Link to the US Department of Labor topic and requirements on Summary Plan Descriptions:

30 Flex-Pay offers FSA administration and HRA administration. Please contact Kia Ramseur, Section 125 Manager, at Flex-Pay for additional information. (336) 714-1208

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