Making Sense of the Alphabet Soup of Healthcare Spending Accounts

Original post

Employers are passing more and more healthcare responsibility to their employees, and in some cases, giving them a greater share of the financial burden. Likewise, businesses are looking for ways to help employees manage healthcare expenses. There are a number of products for that purpose, and while they’re similar, they’re not the same.

With acronyms being used to explain still-new concepts, it can be difficult for employees to understand the difference between them or even to remember which product they use. It’s important to educate them about these products so they get the most out of them.

Health savings account. A health savings account is like a 401(k) retirement account for qualified medical expenses. An HSA helps people pay for medical expenses before they hit their deductible. Employers and employees can both contribute money tax-free, and the money can be rolled over from year to year with only a maximum annual accrual. All contributed funds can be invested once a specific minimum is met (determined by the bank).

HSA-compatible health plans don’t include first-dollar coverage (except for preventive care), which means employees must meet a deductible before benefits will be paid by a health plan. This deductible is set by the IRS each year; in 2016, high-deductible health plans must have a deductible of at least $1,300 for an individual and $2,600 for a family.

Employees and employers can both contribute funds to build an HSA, and all funds count toward the annual maximum. The employee “owns” the HSA and the money that’s in it.

HSA funds can be spent on qualified medical expenses as outlined by section 213(d) of the IRS tax code, dental, vision, Medicare and long-term care premiums, and COBRA (if unemployed). After age 65, health premiums can also be withdrawn, but are subject to income tax.

Just like a 401(k), the account is portable. If the owner of the HSA changes jobs, the money can still be used for medical expenses, but the employee can no longer contribute to it.

Health reimbursement accounts. HRAs help employees pay for medical expenses before a deductible is met. But unlike an HSA, employees cannot contribute to an HRA, only employers. The money an employer places in an HRA can be used for medical expenses not covered by a health plan, such as deductibles and copays for qualified medical expenses as outlined by section 213(d) of the IRS tax code, dental, vision, Medicare and long-term care premiums. The associated health plan can have any deductible amount — there are no minimums and the plan does not have to be a high-deductible health plan. Unlike an HSA, an HRA is not portable, and funds can’t be used for non-medical reasons, even with a penalty. Funds also don’t typically earn interest and are not invested.

Employers must be more involved with HRA accounts since they are the only party who can deposit money; they also determine if funds can be rolled over from one year to the next.

Flexible spending accounts. FSAs allow employees to defer part of their income to pay for medical expenses tax free as part of a Section 125 cafeteria plan. Allowable expenses include those outlined by section 213(d) of the IRS tax code as well as dental and vision expenses. Both employers and employees can contribute to an FSA; however, the amount employees plan to contribute at the beginning of the year can’t be changed mid-year. FSA funds can’t be invested and fees associated with the plan are normally paid by the employer. There are no underlying plan restrictions and these accounts can be maintained alongside traditional health plans. The employer owns the account and is responsible for the management.

Funds in an FSA can be rolled over only if there is a carryover provision; in this case, $500 can be carried to the next year.

With an FSA, individuals must substantiate need for a reimbursement at the time of service by keeping receipts and filling out a form. Some FSAs include “smart” debit cards that automatically pay certain copays and don’t require documentation.

Determining which is best

HSAs, HRAs and FSAs serve slightly different purposes and can even co-exist in some circumstances. For example, those enrolled in an HSA can contribute to a limited-used FSA. Those enrolled in an HRA can also contribute to an FSA without limitations.

HSAs work well for employers who don’t want to add to administrative burdens or additional costs. And they’re a great way to give employees a way to offset the costs of qualified high-deductible health plans and save for post-retirement health expenses. However, employers may want to stray from an HSA or refrain from fully funding the account early in the year if there’s high turnover at a company; the money deposited goes with the employee when they leave.

For employees, HSAs provide investment opportunity and are portable; they also encourage consumerism and are cost-effective to administer. But one of the biggest advantages is that the employee doesn’t have to pre-determine expenses since unused funds carry over.

HRAs can work well for an employer that is not offering a qualified high-deductible health plan but wants to promote consumerism while self-funding a portion of the risk. The funds contributed are immediately available and completely funded by the employer, which is an advantage to the employee. However, there is no tax advantage to employees and the fund can’t be transferred.

FSAs are the most appropriate for employers offering traditional health plans. Employees benefit because they can contribute pre-tax dollars and the funds are immediately available. But the “use it or lose it” provision is a definite disadvantage for employees.

There are pros and cons to all three funds. It’s best to review them carefully to determine which ones will work for your business, and make sure to communicate the funds’ features and restrictions to your employees.

Do You Know The Way To HSA?

Originally posted by Patty Kujawa on January 28, 2015 on

With the rapid growth in high-deductible health plans, health savings accounts provide an option to pay medical bills and save for the future.

Corey Barnett is an avid saver, but doesn't like the idea of stashing his retirement reserves in one place.

That's why when he left his steady job to create a digital marketing company in February 2014, the 25-year-old rolled his 401(k) into an individual retirement account and specifically looked for a high-deductible health plan so he could continue using his health savings account as a way to pay for current medical bills as well as save and invest money for retiree health costs.

Barnett likes the HSA because he finds it tax-savvy and flexible; money goes in, grows and goes out tax-free for medical bills: He can use the money today if he gets sick or he can save it for tomorrow's retiree health bills.

Read full article here.

IRS Urged To Broaden Preventive Coverage In High-Deductible Plans

Originally posted May 9, 2014 by Julie Appleby on

High deductible health plans paired with tax-free savings accounts — increasingly common in job-based insurance and long a staple for those who buy their own coverage – pose financial difficulties for people with chronic health problems. That’s because they have to pay the annual deductible, which could be $1,250 or more, before most of their medications and other treatments are covered.

In a white paper released Thursday, researchers at the University of Michigan say such plans would be more attractive if the IRS broadened the kinds of preventive care insurers were allowed to cover before the patient paid the deductible. Currently, only a limited set of preventive care benefits is included.

“I want the deductibles removed on those things I beg my patients to do,” such as getting annual eye exams if they are diabetic, says author A. Mark Fendrick, a professor of medicine and director of the University of Michigan Center for Value-Based Insurance Design.

If insurers were allowed to offer high-deductible plans that covered “secondary prevention,” such as eye exams, or insulin for diabetics, they would attract 5 million buyers on the individual market, the report projects.  Many consumers would see the policies as an improvement over more “bare-bones” coverage, even if the premiums were higher, said co-author Steve Parente, a professor of finance at the Carlson School of Management at the University of Minnesota.  At least 10 million in job-based insurance might also switch, some of them from more expensive plans that have limited networks of doctors and hospitals, Parente said. Such plans would be most attractive to those with chronic conditions such as diabetes, asthma or high blood pressure.

“If it is attractive to the chronically ill, it could be a major change,” said Parente. The Gary and Mary West Health Policy Center, a nonpartisan research group in Washington, D.C, funded the report.

Still, such plans would carry premiums at least 5 percent higher than current high-deductible health saving account plans, according to the report.

Whether the IRS would consider changing the rules for high deductible plans connected with health savings accounts is unclear.  The agency did not respond to questions.  If it altered the rules, insurers would also have to choose to offer the plans.

Currently, more than 15 million Americans have high-deductible plans that can be paired with tax-free savings accounts, called HSA-eligible plans, according to America’s Health Insurance Plans, the industry trade group.  Of those, about 2 million buy their own policies and the rest get them through their jobs.

Under federal rules, such plans must have at least a $1,250 annual deductible for singles and a $2,500 deductible for families.  Workers can contribute money pre-tax to the special savings accounts to help pay those deductibles. Most large employers offer such a plan as an option and an estimated 15 percent of firms offer only HSA plans or a similar arrangement, called a health reimbursement account, according to the benefit firm Towers Watson.

IRS rules say only primary prevention can be fully covered by the plan outside of the deductible, including such things as routine prenatal and well-child care, some vaccines, and programs to help people lose weight or quit smoking. The rules say such preventive care does not generally include treatments for “existing illness, injury or condition.”

Fendrick and colleagues want the definition changed to allow insurers and employers more options, including allowing coverage of any kind of medical services, including drugs that would prevent complications from or a worsening of a chronic condition, such as diabetes, heart disease or major depression.

“This would be entirely optional for health plans,” Fendrick said. “One plan could [cover] just about everything before the deductible, and another might say they cover five or six drugs, some doctor visits and maybe glucose test strips.”

Help Employees Watch for Hidden Medical Fees

Source: United Benefit Advisors (UBA)

By Mary Drueke-Collins, FSA

As more and more Americans face high deductible health plans (HDHPs) and increased up-front out-of-pocket costs, it is more important than ever to closely monitor medical bills for errors. According to the Medical Billing Advocates of America, more than 80% of medical bills contain errors, which can cost patients thousands of dollars. Those errors may be simple mistakes, double billings, or in some cases, abusive charging practices.

One of the biggest problems for unforeseen fees is when an individual utilizes an out-of-network provider.

Most insurance plans – medical, dental, and vision – have preferred provider networks that help reduce the charges when an in-network doctor is used. If an individual does not use an in-network provider, he or she may be subject to “balance billing.” Here’s what occurs under a balance-billing situation:

  • The insurance company reimburses out-of-network doctors according to a schedule or a percentage of the usual and customary amount. Often times, the doctor’s charge is more than the reimbursement they receive from the insurance company. The doctor can then ask the individual to pay the balance, or the difference between what the insurance company reimburses them and their charges.
  • If an individual uses out-of-network providers, not only will he or she be responsible for the deductible, coinsurance and copayments, but he or she may also be responsible for this balance billing. Balance billing is common in medical, dental, and vision plans.

If an individual is covered by an HMO plan, he or she may not even have coverage for non-network doctors and hospitals. Before an appointment to see a doctor or have a procedure is done, make sure the doctor is in-network and the procedure(s) will be covered by the insurance plan.

Know The Benefits

Some medical plans have copayments for services – emergency room visits, inpatient hospital stays, certain kinds of surgeries. It’s a good idea to understand what benefits an individual’s insurance plans cover before he or she has a major service. Then there won’t be any surprises after the procedure.

Preventative Procedures

Most medical plans provide coverage for annual preventive exams, including pap smears, mammograms, and immunizations for children and adults. This coverage is usually provided without the individual having to pay anything – no copayments, not subject to deductible and coinsurance. Sometimes when the claim is sent to the insurance company from the doctor, the claim isn’t submitted correctly (as a preventive exam). In those instances, the individual has to pay a copayment or the cost of these claims.

If an appointment for a preventive exam is scheduled with a doctor and the insurance company does not pay for the exam like someone thinks it should be paid, then that person should call his or her insurance company and/or doctor and ask them why. This person should also check with his or her doctor before any blood work is completed to ensure the tests are all covered under the insurance plan.

Health Savings Accounts (HSAs)

If a business owner offers an HSA eligible plan to his or her employees, that person should consider going to a corporate bank and asking them to waive the fees for the employees on their Health Savings Accounts (an HSA eligible plan is also called a qualified High Deductible Health Plan). This is especially valuable if the employer is contributing to the HSA accounts and every employee is opening one.

The Explanation of Benefits (EOB)

Always check the doctor’s bill versus the Explanation of Benefits received from the insurance company. Make sure all of the charges line up and that the doctor actually performed all those services.

Shop Around

The cost of services in general can vary dramatically from doctor to doctor.  Most insurance plans offer cost and quality information on their websites. Most consumers shop around and do research when purchasing a TV or a new car, but they don’t take that extra step when it comes to their health. Insurance companies are providing more of that information. Consumers need to get in the habit of taking advantage of the information that’s available to them.


On the prescription drug side, medical plans may require an individual to pay a portion of the prescription drug costs if that particular drug has a generic alternative. When a prescription is filled at the pharmacy, it may not just cost someone the copayment, but the extra penalty for not selecting the generic. In some instances, that penalty will not apply if the prescription is written as “dispense as written” (DAW) by the doctor.

The insurance plan may require an individual to try some lower cost alternatives before it will pay for a higher-cost drug. This is called  “step therapy.” Or, the insurance plan may require an individual to get prior authorization (PA) before filing the prescription. A doctor or pharmacist should be able to help someone identify the drugs that fall into these scenarios.

If someone is on a very expensive drug or a drug that requires special administration or delivery (often called a specialty drug), the insurance plan may require that person to get the prescription filled through a particular pharmacy. If that person does not fill the prescription through the insurance company’s specialty pharmacy, he or she is often charged a penalty or the claim may be denied.


Employee communication is critical, and helping them understand how to save money by keeping an eye on their medical bills as well as how they use medical services could save an organization and their employees a lot of money.

To make sure your plan design offers the best value to you and your employees, have us benchmark your health plan against other employers your size and with those in your region and industry. Find out more about benchmarking here: