Another recent proposal of the Trump Administration would allow employers to fund tax-exempted Health Reimbursement Arrangements to help pay for an employee’s individual health insurance premiums. In addition, the proposal would also allow employers that offer group health coverage to fund an HRA of up to $1,800 to reimburse employees for “qualified” medical expenses. Easing restrictions in this manner is seen by many as a big boost for small businesses that are unable to provide employer-sponsored healthcare. Comments are being accepted through December 28, 2018 and if approved, the new rules would apply for plan years beginning on or after January 1, 2020.
Since 2007, adults ages 18 to 64 with employment-based coverage have increasingly chosen High Deductible Health Plans (HDHP), both with and without Health Savings Accounts (HSA), over traditional plans.
In 2017, the number enrolled in HDHPs without an HSA rose to 24.5%, while HDHPs with HSAs rose to 8.9%. Some employers are choosing to only offer HDHPs, helping shift employees away from traditional plans.
Health savings accounts are hot, with nearly two-thirds of respondents to a Plan Sponsor Council of America survey saying they believe that even those without a high deductible health plan should qualify. A benefit often cited by employers and employees alike is that HSAs can be a valuable part of one’s retirement strategy, since healthcare expenses are viewed as one of the largest people face in retirement.
Between rising healthcare costs, changes to community ratings and healthcare reform efforts, there’s no question the employee benefits landscape is continually changing — and keeping the hands of benefits managers full.
With all these changes, employers need to think creatively when it comes to building and administering their health plans. While consumer driven plans and health reimbursement accounts are not new, they are becoming much more commonplace and their importance is now greater than ever. HRAs, in particular can help employers create a self-insurance plan for their employees and maintain rich benefits.
HRAs help employees pay for medical expenses before a deductible is met. They’re essentially employer-funded group health plans that reimburse employees for medical expenses up to a certain dollar amount. Employers fund and own the accounts — which means they get to keep all savings and any unused funds. HRAs can help employers in a number of ways.
A first step toward self-insurance
One of the many changes we have seen over the past few years is a growth in the self-insured marketplace. While in the past self-insurance was only for the larger, cash-rich employers, more and more mid-market businesses are now looking into it in order to cut cost and regain control of their benefits.
For businesses that can’t self-fund, are not yet ready to move to a self-insured plan, or are looking for a way to just dip their toe in the water, HRAs are a great alternative and option. HRAs allow businesses to self-insure only a small portion of the healthcare plan (copays, deductible, pharmacy benefits, etc.) while still seeing substantial savings and having access to detailed claims information.
Maintaining rich benefits and combatting community rating
Since community rating rules have expanded in some states, small to midsize employers have been forced to conform to “metal tier” plans — bronze, silver, gold and platinum — that determine how costs are split. Companies no longer have the opportunity to customize benefits and offer low copays and a high hospitalization rate or high copays and a low hospitalization rate, for example.
Besides the cost-saving mechanism, HRAs enable employers to keep their plan creativity. This translates into a customized benefit plan design that fits a company’s needs at an affordable cost.
How HRAs work
Consider a 200-life group called “H-Corp.” H-Corp offers rich benefit plans with $20 office and specialist copays and a $1,000 deductible. H-Corp pays $1,500,000 annually for their benefits.
The company decides it is spending too much on healthcare and seeks a way to offer the same benefits while lowering the annual cost. H-Corp’s insurance broker recommends a plan with a $50 copay and a $3,000 deductible, which would reduce their annual spend to by $500,000. In order to keep the same benefits, H-Corp implements an HRA to reimburse employees for the difference in copays and deductibles. Based on the last three years, H Corp predicts their HRA claims to be $100,000 to $150,000. Therefore, using an HRA translates into a $350,000 savings for the exact same benefit plan.
Here’s another scenario: A 90-life group in New York, “B-Corp,” was manually rated last year but this year was forced to lay off 10% of their workforce, moving them into the community-rated pool. Their employees are accustomed to a certain level of benefits and while B Corp wants to maintain as much continuity as possible, none of the metallic tiers are close to what they currently offer. The company could consider choosing a bronze or silver plan and use an HRA to build the plan back up to a level closer to their current offering.
What to watch out for
There are some pitfalls in administering an HRA. Because an HRA is a self-funded plan layered over a fully insured plan (rather than a reimbursement plan), all self-insured guidelines apply. For example, self-insured employers, as well as all insurance issuers, must help fund the Patient-Centered Outcomes Research Institute by paying the PCORI fee. Employers administering HRAs must also abide by nondiscrimination rules. Most employers work with a third-party administrator to pay claims, handle fees and ensure compliance.
It’s vital for employers to ensure HRAs are being administered properly to avoid penalties. But as health insurance costs continue to rise, HRAs are becoming a more popular way to control costs and provide a level of benefits that employees will appreciate.
The IRS and Department of Health and Human Services recently released new limits for contributions to HSAs and Health FSAs for 2017. Contributions by individuals to HSAs cannot exceed $3,400 in 2017, with the maximum family contribution remaining at $6,750, the same as 2016. Once again, a $1,000 catch-up contribution also applies.
Health FSA limits for 2017 have been increased by $50 from $2,550 per employee to $2,600. Health FSA transportation fringe benefits for parking, transit passes or vanpooling are remaining the same this year, with a limit of $255 for each.
The IRS began indexing affordability safe harbors to inflation last year. This year, minimum annual deductibles for High Deductible Health Plans (HDHPs) remain unchanged at $1,300 for individuals and $2,600 for families, with required out-of-pocket maximums remaining at a minimum of $6,550 for individuals and $13,100 for families.
While President Donald Trump has talked about several remedies for healthcare, one he mentions often is expanding the use of Health Savings Accounts (HSAs) – consumer directed accounts that are typically paired with high deductible health plans (HDHPs). Like flexible spending accounts (FSAs), they offer a convenient way to pay for out-of-pocket costs like doctor visit co-pays and other qualified medical expenses.
No Use It or Lose It Rule
One big advantage HSAs offer is that account balances are not subject to the Use It or Lose It rule that applies to FSAs – surplus funds can roll over from year to year. The IRS maximum annual contribution in 2017 is $3,400 for individuals and $6,750 for those with family coverage under a HDHP. Individuals age 55 and older can contribute an extra $1,000. HSAs can be used to pay for qualified medical expenses, while surplus funds can grow and be used in the future. Employer contributions, where available, can go a long way in meeting future qualified medical expenses. According to the 2016 Devenir HSA Market Survey, nearly a third of all funds contributed to HSAs in 2015 came from employers, with the average employer contribution being approximately $850.
A Triple Tax Advantage
A HDHP with an HSA can make it easy to set aside pre-tax dollars through payroll deductions. Individuals can also fund an HSA with after-tax dollars, which can be taken as a tax deduction on their personal tax return. Finally, all contributions accumulate tax free and can be withdrawn tax free to pay for future qualified medical expenses, including in retirement. No federal tax is due on funds contributed to a Health Savings Account, and many states follow the federal tax law.
Looking ahead, we know that healthcare costs will continue to rise and the need to engage employees will grow. Regardless of actions taken by the new administration, we believe HSAs are a great way to help employees save for future medical expenses and better understand the importance of cost and quality in the process.
The Internal Revenue Service (IRS) has announced the inflation-adjusted contribution limits for health savings accounts (HSAs) and health flexible spending arrangements (health FSAs) for tax year 2017.
2017 Contribution Limits
The tax year 2017 contribution limits for HSAs and health FSAs are as follows:
- HSAs: The annual limitation on deductions for an individual with self-only coverage under a high deductible health plan (HDHP) is $3,400 (up from $3,350 for 2016). The annual limitation on HSA deductions for an individual with family coverage under an HDHP is $6,750 (unchanged from 2016). For 2017, an HDHP is defined as a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage (unchanged from 2016), and annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) that do not exceed $6,550 for self-only coverage or $13,100 for family coverage (unchanged from 2016).
- Health FSAs: The annual dollar limitation on employee contributions to employer-sponsored health FSAs rises to $2,600 (up from $2,550 for 2016).
Visit our HSAs, FSAs, and Other Tax-Favored Accounts section for more on HSAs and health FSAs.
The IRS has released the 2016 inflation adjusted amounts for health savings accounts (HSAs). To be eligible to make HSA contributions, an individual must be covered under a high deductible health plan (HDHP) and meet certain other eligibility requirements.
High Deductible Health Plan Coverage
An HDHP has a higher annual deductible than typical health plans and a maximum limit on the sum of the annual deductible and other out-of-pocket expenses. For 2016, the minimum annual deductible is $1,300 for self-only coverage or $2,600 for family coverage. Annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) may not exceed $6,550 for self-only coverage or $13,100 for family coverage.
Annual HSA Contribution Limitation
An eligible employee, his or her employer, or both may contribute to the employee’s HSA. For calendar year 2016, the annual limitation on HSA deductions for an individual with self-only HDHP coverage is $3,350. For an individual with family coverage under an HDHP, the annual limitation on HSA deductions is $6,750. The limit is increased by $1,000 for eligible individuals age 55 or older at the end of the tax year.
You can learn more about HSAs in our section on Health Savings Accounts.
While the ACA’s excise tax, scheduled to become effective in 2018, may seem like a soft cloud in the distant horizon, some employers have targeted 2015 as the time to look for ways to avoid the tax imposed on high value health plans.