Unrecognized Costs of HSAs
Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) are very similar. They are both used as a pre-tax means of funding out-of-pocket medical expenses and are normally coordinated with High Deductible Health Plans (HDHP). While HSA accounts may be helpful to employees, they offer a very different outlook for employers who contribute to these accounts. Employers who examine the differences between HRAs and HSAs usually find that HRAs will provide a better solution.
The main reason for this is that an HSA account will cost more than an HRA account. An HSA significantly expands medical coverage to include over-the-counter, dental, vision and non-medical expenses, thus defeating the purpose of establishing the plan in the first place…i.e. saving money.
Participants can legally spend their HSA funds on non-medical expenses if they pay taxes and a penalty fee. Most employers choose these plan designs to help reduce their employees’ out of pocket medical expenses. Allowing employees to buy tires, groceries or that really nice flat screen tv they’ve always wanted does not help to accomplish this goal.
In contrast, an HRA plan allows employers to control their plan’s eligible expenses. An employer can allow or exclude over-the-counter items, co-insurance, deductible, prescriptions, vision, dental expenses and even out-of-pocket expenses from another employer’s medical plan. The design options allow limitless customization.
This chart shows two examples of how an HRA could save money over an HSA. The medical expenses represent claims that would normally be covered by the insurance plan. Lasik surgery, vision, over the counter (OTC), dental, and other non-medical expenses are shown to illustrate the negative impact an HSA can have when the employer is funding this account.
Overall, “healthcare” dollars through an HSA quickly become “anything” dollars and employers have no way to limit spending. An HRA allows employers to select their plan’s eligible expenses and help control what their “healthcare” dollars are funding. For employers who are attempting to reduce their healthcare costs, HRAs are the way to go.