Account-based health plans vs. healthcare reimbursement plans

As an employer, you always want to offer the best possible healthcare benefits for your employees. But with healthcare costs rising, making sure those health benefits options are also budget-friendly is also crucial.

By adding an affordable health benefit to your compensation package, you’ll be able to better attract and retain employees, improve morale, and support your employees’ overall wellbeing.

Two popular benefits that have gained traction lately are account-based health plans (ABHPs) and health reimbursement plans.

While these two plans have their differences, they are both designed to save you and your employees money. Let’s go over account-based health plans and health reimbursement plans, their pros and cons, and when they can work for your business and employees.

What is an account-based health plan?

ABHPs are health benefits that pair a health insurance plan with a medical spending account, like a health savings account or a flexible spending account. With their ABHP, your employees and their dependents save on out-of-pocket costs with the pre-tax dollars you each contribute to the account.

These plans help you and your employees save on taxes. When you contribute money to an employee’s ABHP, you’re allowed to take a federal income tax deduction. If an employee makes a contribution through a payroll deduction, you don’t have payroll taxes on that amount. This lowers your FICA and unemployment tax liability.

Your employees have many options on how they can spend the pre-tax money in their account. IRS-qualified medical expenses allowed under ABHPs include medical care, prescription drugs, dental and vision care, over-the-counter medications, and other health-related items.

Two common types of spending accounts associated with ABHPs are:

• Health savings account (HSA): an employee-owned, employer-contributed account that allows pre-tax saving for medical costs. They’re paired with high-deductible health plans (HDHPs), and stay with the employee if they switch jobs. Money contributed to an HSA has no expiration date.
• Flexible spending account (FSA): a pre-tax savings account for medical expenses funded mainly by the employee. They can be paired with various health plans, but unlike HSAs, they stay with the employer, and the funds expire each year.

The most beneficial ABHP for employees features affordable premiums and employer contributions. By helping employees become more aware of their healthcare costs, these accounts encourage them to become responsible for their medical decisions.

Pros of an account-based health plan

ABHPs offer advantages that can make them attractive to your organization. As stated above, the main benefit of ABHPs is that they can lower your and your employees’ overall taxes and help them save money on their healthcare.

Here are some other pros to ABHPs:

• Eligible expenses include a wide range of medical, dental, and mental health services.
• Contributions can come from both you and your employees.
• Employee and employer contributions are typically made with pre-tax dollars through payroll deductions.
• Account withdrawals aren’t subject to taxes if they’re used on qualified medical expenses.
• Many ABHPs issue a debit card to participants, which allows them to pay for expenses directly.

Cons of an account-based health plan

The advantages to ABHPs benefit both employers and employees alike. However, these types of plans also come with downsides.

Here are some cons to HSAs and FSAs:

• HSAs are tied to HDHPs. This means your employees are responsible for meeting their deductible before their health insurance plan will begin paying for their healthcare costs.
• Both HSAs and FSAs are pre-funded accounts, so you’ll have to put up the money ahead of time. With HSAs, your contributions will stay in your employee’s account, even if they don’t use the money.
• FSA funds are typically “use it or lose it,” meaning your employees will lose any amount they haven’t spent at the end of the year unless you select a rollover option.
• FSAs are tied to employment, so your employees will lose their account if they leave their job.
• HSAs have annual contribution limits that the IRS sets. Similarly, FSAs have contribution limits¹.
• You can't set up both an HSA and an FSA unless it’s a limited-purpose FSA.

When does an account-based health plan work best?

ABHPs can help your employees more easily manage their out-of-pocket medical expenses throughout the year. But choosing one will greatly depend on the type of workforce you have.

In general, if your workforce is primarily healthy and younger with few medical conditions, an HSA with an HDHP is a good option. You can save money on your monthly health insurance premiums since it’s likely your staff won’t need much care.

If you have an older workforce with high medical costs, they’d have a significant amount to pay out-of-pocket, even if you contributed the maximum amount to their HSA. For that reason, individuals with higher healthcare costs can often find savings with a more generous plan than an HDHP, disqualifying the HSA as an option.

FSAs offer less flexibility than HSAs, and your employees may not be able to get the most out of it if they don’t have extra income to set aside for contributions. If you’re looking for a way to boost your employees’ health benefit, making employer contributions to an FSA could make it more attractive.

What is a health reimbursement plan?

Unlike traditional group health plan coverage, a health reimbursement plan is a benefit where you reimburse your employees for qualified medical expenses in IRS Publication 502.

A health reimbursement plan isn’t health insurance. Instead, it’s a health benefit employers offer employees to supplement their group health plan or to purchase their own health insurance plan.

Two common types of health reimbursement plans are:

• Health reimbursement arrangement (HRA): a tax-advantaged health benefit that is 100% employer-funded.
• Qualified small employer HRAs (QSEHRAs) and individual coverage HRAs (ICHRAs) are used to cover health insurance premiums, whereas integrated HRAs are used to augment group health coverage.
• Health stipend: While some employee stipends are added to an employee’s paycheck as extra wages to pay for out-of-pocket medical expenses, you can choose to offer them as reimbursements, similar to how HRAs function.

With a health stipend or HRA (depending on the type of HRA you have), you set a defined allowance amount for eligible employees to pay for their health insurance premiums and other medical expenses.

Once an expense is incurred, the employee is reimbursed up to their allowance amount. Depending on how you set up your HRA, you may be able to roll money from year to year. If you offer an HRA with PeopleKeep, only month-to-month rollover is permitted.

Reimbursement plans are a powerful tool in the healthcare market. With them, your employees can take better control of their personal medical needs and decide where their healthcare dollars are best spent.

Pros of health reimbursement plans

Like with ABHPs, the advantages of health reimbursement plans are numerous. Let’s go through some of their highlights and benefits below.

Here are some pros to health reimbursement plans:

• HRA employer contributions are tax-deductible and free from payroll taxes. Employee reimbursements are also free of federal income taxes, as long as their insurance policy meets minimum essential coverage (MEC).
• Your employees have greater choice over their personal healthcare decisions and can use the available funds to cover eligible out-of-pocket medical expenses.
• HRAs and stipends can act as a supplement to a company’s benefits package, helping it outshine the competition and convince a prospect to accept your job offer.
• Reimbursement plans are lower risk for you because they don’t pay out on qualified expenses until an expense is verified and approved.
• As the sole contributor, you have the flexibility to design a plan that best suits the needs of your workforce.

Cons of health reimbursement plans

Considering all the pros above, it’s easy to see why health reimbursement plans are increasing in popularity. But they’re not without their drawbacks as well.

Here are some cons to health reimbursement plans:

• Because health reimbursement plans are employer-funded, if an employee leaves the company or the job is terminated, the HRA money stays with you.
• Self-employed individuals aren’t eligible for an HRA or a health stipend. However, spouses of the self-employed individual are eligible if they are employees and not jointly self-employed.
• Reimbursement plans tend to come with a learning curve for employees if they’re only used to traditional group health insurance and aren’t familiar with the reimbursement model.
• Unlike HRAs, stipends are subject to federal income taxes at the end of the year.

When do health reimbursement plans work best?

To determine whether a health reimbursement plan is a good fit for your business, you’ll first need to make sure you meet the eligibility guidelines. For example, to offer a QSEHRA, you must have fewer than 50 employees.

Stipends are much less regulated, so you can offer them to whichever employees you choose and even set employee classes.

Next, you should review your budget. If you’re already paying for a traditional group health plan, an integrated HRA can help supplement it. However, if group health insurance isn’t in your budget, an ICHRA is a strong choice.

A health stipend is an excellent choice for budget control because it has no contribution limit, so you can offer as much as your budget allows.

Finally, consider whether the plan would work for your employees. For example, a QSEHRA is an excellent solution if you're a small business with employees with a diverse range of insurance situations. However, if you want to set different allowance amounts for different employees, an ICHRA would be a better fit.

How you can offer personalized health benefits with PeopleKeep

If you think a health reimbursement model benefit is the way to go, PeopleKeep has the answer. PeopleKeep makes employee benefits administration simple for HRAs.

We strive to make health benefits hassle-free. In fact, most of our customers only take a few minutes per month to administer their employee benefits.

With our HRA software, lengthy benefit administration tasks like preparing legal documentation, reviewing reimbursements, and managing documents are conveniently automated for you. You control your costs by choosing allowance amounts that fit your budget.

We have an HRA for businesses of any size, so whatever you’re looking for, either a standalone benefit or a plan to boost your group health plan, PeopleKeep has a solution for you.

Conclusion

Whether you’re a start-up or a seasoned company that’s been operating for years, it’s important to offer employee health benefits. Both ABHPs and reimbursement models can serve as valuable benefits in attracting and retaining the right employees, leading to new business opportunities that help everyone.

If you think a health reimbursement plan, like an HRA, is suitable for your organization, PeopleKeep has just what you need. Contact our team of HRA specialists, and we’ll get you matched with your perfect benefit solution.

¹https://www.irs.gov/pub/irs-drop/rp-21-45.pdf