Employer interest in consumer-directed health plans (CDHPs) continues to increase, fueled by the allure of potential cost savings as well as innovative new options that have made their way into the marketplace.
CDHPs, as offered by most health plan carriers, are comprised of three essential components — a health fund or account, a deductible-based health plan and Web-based education tools with information to help members make more-informed health care decisions. Below is an introduction to CDHP funding options.
Funding good health
When CDHPs first began appearing a few years ago, early adopters offered one account option: the health reimbursement arrangements (HRA). But employers now have four options — HRAs, HSAs, RRAs and FSAs. This increase in options is fueling the adoption of CDHPs. For example, a recent study by the industry group Americas Health Insurance Plans found that the number of people who have Health Savings Accounts (HSAs) —one of the newest types of CDHP —has more than doubled since September 2004 to over a million people.
So, what are each of the CDHP options?
HRAs
An HRA is a fund that the employer establishes and solely funds, and which employees can use to pay for qualified medical expenses. Account balances can be carried over at the end of the year. If the employee leaves the company, however, the account does not travel with them.
As the sole funder, this can work in an employer’s favor and may make the fund a useful retention tool. Another potential benefit to employers is that they might be able to deduct reimbursements of employee medical expenses made from the HRAs as business expenses.
HSAs
A health savings account is a tax-advantaged account created to pay for medical care expenses. But, unlike the employer-only funding feature of the HRA, you, your employees and their family members (or any combination) may contribute.
Your employees can contribute to the HSA on a pre-tax basis as part of a cafeteria plan offering or may use after-tax dollars. HSA funds can be invested for tax-free growth and withdrawals for qualified medical expenses are also tax-free. In addition, leftover HSA funds automatically roll over from year to year.
Note that, unlike an HRA, the money in an HSA is portable: any dollars an employer places into employee’s accounts become the employee’s money, traveling with them if they leave the company.
RRAs
Retiree reimbursement accounts are like the original HRAs, except they reimburse medical costs only after a worker retires. Employers create RRAs for active employees, then employers (and only employers) credit the accounts.
A key feature of the RRA is that the employer retains control over the plan design. This means, for example, that employers can put in a place a schedule for vesting of the credits.
Also, RRA contributions can be extended into an employee’s retirement years, potentially making it a flexible and valuable retiree benefit.
FSAs
A flexible spending account allows an employer, an employee, or both to make regular deposits to an account through salary reduction. For employees, this money avoids both income tax and Social Security tax. As with the other approaches, money in the FSA can only reimburse qualified medical expenses.
However, unlike HRAs, HSAs and RRAs, the balances in an FSA cannot carry forward. Employees forfeit any unspent funds in the account at the end of the year. This means that employees must accurately project their anticipated health care expenses to avoid a use-it-or-lose-it dilemma.
Understanding the details
Clearly, the opportunities in consumer-directed health plans are enormous — but accompanied by some complexity. The chart above is a brief introduction to CDHPs and is not exhaustive, so please consult with your insurance broker, consultant or tax adviser to assess the various consumer-directed plans — and their associated accounts and funds — in the context of your overall benefits strategy.
Thomas J. Scurfield is general manager and head of sales for Aetna’s north central east region and is based on Cleveland. He has more than 25 years of experience working in employee benefits and holds both the Chartered Life Underwriter and Certified Employee Benefit Specialist designations. Reach him at (330) 659-8020 or [email protected].
