Revised December 2014 Health FSA-HRA-HSA Comparison Chart Health Flexible Spending Internal Revenue Code source Section 125 (cafeteria plans) applies to an arrangement where employees have a choice among cash (taxable) and non-taxable benefits. Section 105 applies to employer reimbursement of medical benefits. Section 106 applies to employer (or employee salary reduction) contributions. Section 105 applies to employer reimbursement of medical benefits. 1 Section 106 applies to employer contributions. Section 223 permits deduction for contributions to an HSA. Section 106 applies to employer contributions. HSAs are not typical employee benefit plans. While the employer can make a taxfree contribution, HSAs are not employer-provided group health plans like health FSAs and HRAs. Who can set up the arrangement/account? The employer can set up and maintain the arrangement. The employer can set up and maintain the arrangement. The employee sets up an individual account, with the employer providing access to the account (e.g., web portal). Unlike FSAs and HRAs, an HSA can be set up by the employee without employer involvement or sponsorship. Who can be a participant? Any employee or former employee, subject to plan design limits. Any employee or former employee, subject to plan design limits. Any individual covered under a qualified HDHP. Eligible individual cannot be entitled to Medicare and/or claimed as a tax dependent. An eligible individual cannot have any impermissible non- HDHP coverage. This includes general-purpose health FSA coverage of the employer, a spouse s employer, or general-purpose health FSA coverage subject to a grace period or carryover. Unlike FSAs and HRAs, HSAs require a specific type of medical coverage as a condition of on-going participation. A spouse can have single coverage that is not HDHP coverage without affecting employee's participation (e.g., eligibility to make HSA contributions). Coverage under a suspended or deferred HRA will not affect participation (e.g., eligibility to Health FSA-HRA-HSA Comparison Chart 1
However, an HSA-compatible health FSA or HRA 2 does not prevent HSA eligibility. make HSA contributions during suspension or deferral period). An employee can participate in a limited-purpose FSA that reimburses only permitted coverages without affecting eligibility for an HSA contribution. 3 When can contributions be made? Anytime, subject to plan design limits. Anytime, subject to plan design limits. The first month the individual is an eligible individual. 4 Impact of grace period or carryover: Coverage under an FSA or HRA (other than an HSAcompatible FSA or HRA) is not permitted coverage, so an individual generally is not allowed to make an HSA contribution for any month in which he/she has such coverage. Disqualification lasts through the entire plan year, even if the FSA balance (including carryover funds) is exhausted. An individual is eligible if FSA carryover amounts roll to an HSA-compatible FSA. Additionally, a plan may permit individuals (prior to For FSAs, uniform coverage rule applies and, so plans typically require contributions to be made on a monthly basis. In order to be deductible or excluded from an employee s gross income, HSA contributions must be made by the tax filing date (without extensions) for that calendar year (e.g., April 15). Health FSA-HRA-HSA Comparison Chart 2
the beginning of the plan year) to waive or decline the carryover amounts. How much may be contributed annually? Salary reduction contributions capped at $2,550 for 2015, adjusted for cost of living increases. A carryover of up to $500 in unused amounts permitted (amounts do not count toward salary reduction limit). 5 No statutory limit. Employer may impose limit as part of plan design. Annual limit is sum of monthly limits. 2015 monthly limit is 1/12 of the annual maximum of $3,350 (single HDHP coverage) or $6,650 (family HDHP coverage). 6 Catch-Up Contributions: An additional monthly contribution of up to 1/12 of a $1,000 annual maximum is permitted for individuals who turn 55 before the end of the individual's tax year. Late Entrant Rule: Employees can contribute full HSA contribution for the calendar year (including catch-up contributions) if the individual is eligible for an HDHP during December and remains in HDHP coverage for the full calendar year thereafter. For those who leave HDHP coverage mid-year, contributions are limited to 1/12 of HSA annual limit for each month of HDHP coverage. Contributions to other HSAs are aggregated for purposes of the limits. Who may contribute? Employers. Employees, through salary reduction contributions (deemed employer contributions from a tax perspective) via a cafeteria plan. Employers. Salary reduction not permitted. Employers on behalf of the eligible individual. Employees, through cafeteria plan salary reduction contributions. Alternatively, employees may contribute "after-tax" money and take above-the-line deduction on Individuals outside of the employment relationship also can make contributions to an individual s HSA. Health FSA-HRA-HSA Comparison Chart 3
tax return. Other individuals on behalf of the eligible individual. 7 May any unused balance carry over to future years? Generally, no. Unused amounts must be forfeited at year end unless grace period or carryover is provided. Grace period: Permits any remaining amounts to reimburse claims incurred during the first 2½ months of the subsequent plan year. Carryover: Permits carryover of up to $500 in unused health FSA amounts to be used to pay or reimburse expenses incurred in the immediately following plan year. Plan may offer either a grace period or carryover, but not both in any given year. Yes. Through plan design, the employer may define the extent to which the funds can accumulate and carry over to future years. Yes. The account belongs to the individual. The employer may not impose time limits on the use of the account. The HSA account balance belongs to the individual and can be used at any time, even if the individual is not eligible to contribute to the HSA. How is the arrangement/account set up and funded? Generally, book entry with claims paid from general assets of employer as they are submitted by the employee. The account may be funded by a trust, which would typically be a VEBA under Code section 501(c)(9). Generally, book entry with claims paid from general assets of employer as they are submitted by the employee. The account may be funded by a trust, typically a VEBA under Code section 501(c)(9). Trust account created under Code section 223. Employee must set up account. Earnings on the trust are nontaxable unless they produce business income (such as certain limited partnership). Code section 419/419A limits do not apply for purposes of determining unrelated business taxable income An employer may make HSA contributions at any time during the year. Employee could have tax implication if the employer contribution causes the employee s overall contribution to exceed the statutory limit. Under an FSA, full amount of an employee s election must be available on first day of the Health FSA-HRA-HSA Comparison Chart 4
("UBTI") for HSA interest. The account must be funded, with the assets held by a bank, insurance company, or similar approved financial institution. plan year (uniform coverage rule). HRAs generally must be integrated with the employer s major medical coverage (e.g., for active employee population). What happens when the employee terminates employment or dies? Employee or employee's surviving spouse and children may continue to participate in the plan for the remainder of the plan year under COBRA. Most health FSAs qualify for special limited COBRA obligation, whereby (1) COBRA coverage need not be offered to qualified beneficiaries who have overspent their accounts, and (2) for those with underspent accounts, COBRA coverage may be terminated at end of the year in which the qualifying event occurs. COBRA applies, but employer also can allow former employees or dependents to draw down the funds. There has been no official guidance on how COBRA rules are applied in the HRA context. An individual who maintains qualified coverage following termination can continue to make contributions. The individual may also continue to use account after termination until it is depleted, even if the individual no longer maintains qualified coverage. After employee's death, account goes to the designated beneficiary. If designated beneficiary is the spouse, the account remains a tax-favored HSA for the spouse. If designated beneficiary is anyone else, the account balance is taxable income to the beneficiary. COBRA rules will not apply unless HSA is subject to ERISA (which is rare). Cash flow is the major difference between the arrangements/accounts. With HSAs, employer contributions may never revert back to the employer if the employee terminates or dies. With FSAs and HRAs, accrued/unused funds can remain with the employer when the employee no longer participates. What expenses can be reimbursed on a nontaxable basis? Qualified medical expenses as defined in Code section 213(d). Qualified medical expenses as defined in Code section 213(d). With regard to premium Qualified medical expenses as defined in Code section 213(d). Generally may not reimburse For all accounts, over-thecounter medicines other than insulin cannot be reimbursed unless prescribed by a Health FSA-HRA-HSA Comparison Chart 5
reimbursements, the scope of HRAs for an active employee population has been limited by ACA guidance. 8 health insurance premiums (with limited exceptions for COBRA coverage, long-term care insurance, health coverage while drawing unemployment compensation, and, if 65 or older, any health insurance except a Medicare supplemental policy). May not reimburse health insurance premiums. physician. Under FSAs and HRAs, the employer must receive substantiation of the medical expense. This employer obligation does not apply to distributions under HSAs, but individuals should maintain records of their medical expenses to substantiate HSA distributions. HSA medical expenses must be incurred after HSA is established. (Similar rules apply to FSAs and HRAs.) Are distributions other than for qualified medical expenses permitted? Generally, no (with the exception of experience gains). No Yes, but additional taxes are imposed. Distributions for nonmedical expenses are taxable and generally subject to a 20% excise tax (certain exceptions apply). 9 The additional tax does not apply to distributions made after the individual has attained age 65, become disabled, or died. An FSA has an experience gain if employer contributions (including salary reductions) for the plan year exceed reimbursements for that same year. Taking into consideration the Code and ERISA, plan design can indicate permissible uses of such gains. A distribution made to correct excessive HSA contributions (and earnings) is permissible and not subject to an excise tax as long as the amount is taken into income before the individual s income tax filing date (e.g., April 15 th ). Health FSA-HRA-HSA Comparison Chart 6
Are expenses of children up to age 26 eligible for reimbursement if a child doesn t qualify as a tax dependent? Yes. The plan can reimburse expenses of an employee s child, stepchild, or foster child through the calendar year in which the child turns age 26, even if the child is not a dependent for health coverage purposes. Yes. The plan can reimburse expenses of an employee s child, stepchild, or foster child through the calendar year in which the child turns age 26, even if the child is not a dependent for health coverage purposes. No. While the HDHP must comply with the requirement that health coverage be provided until a child turns age 26, the child s expenses are only eligible for reimbursement if the child is a tax dependent of the account holder under federal tax law. The ACA mandated coverage for children up to age 26, but did not amend Code section 223 to provide for reimbursement of HSA expenses for non-tax dependent children. Subject to ACA market reforms, including annual or lifetime dollar limits, SBC requirements, etc.? No, if excepted benefit 10 No, if excepted benefit No While the SBC requirement does not apply to HSAs because they are generally not group health plans, it does apply to the underlying HDHP. Also, retiree-only HRAs are not subject to the ACA s market reforms. Subject to nondiscrimination requirements? Yes. Generally, subject to nondiscrimination provisions of Code sections 125 and 105(h). Yes. Subject to nondiscrimination of Code section 105(h). Yes, if the employer contributes to an HSA outside of a cafeteria plan, generally it must make comparable contributions (same dollar amount or same percentage of HDHP deductible) to comparable participating employees (those with the same category of HDHP coverage). 11 If the HSA is offered through a cafeteria plan, it will be subject to Code section 125 Payments to health FSAs, HRAs and HSAs often include: Employer match of employee contributions Special contributions related to wellness/ disease management Varied contributions by class of employee Nondiscrimination outcomes can depend on the compensation status of employees receiving these Health FSA-HRA-HSA Comparison Chart 7
Subject to the Cadillac excise tax under the ACA? Value subject to Form W-2 reporting? Health Flexible Spending discrimination rules (rather than the comparability rules). Yes Yes Generally, yes. Employer contributions to an HSA are subject to the tax. Pre-tax employee contributions also appear to be subject, but not after-tax employee contributions. Depends on the circumstances. Salary reductions are not subject to reporting. However, employer contributions in excess of the total amount of an employee s salary reductions made for all qualified benefits in cafeteria plan must be reported. contributions. The application of the excise tax could significantly affect the design of these plans starting in 2018. No No An employer may voluntarily report HRA contributions. Subject to ERISA? Yes Yes In most cases, no 12 Note that FSAs, HRAs, and HSAs are not subject to ERISA when sponsored by non-erisa entities such as churches or public entities. Health FSA-HRA-HSA Comparison Chart 8
1 See Revenue Rulings 2002-41 and Notice 2002-45. 2 An HSA-compatible HRA is an HRA that only reimburses: (a) dental and vision expenses (limited purpose HRA), (b) medical expenses after the HDHP annual deductible is satisfied (postdeductible HRA), (c) expenses incurred after retirement (retirement HRA), or (d) expenses incurred only after an individual no longer participates in an HDHP (suspended HRA). 3 See Notice 2004-45. 4 An eligible individual has qualified HDHP coverage and no impermissible non-hdhp coverage. (See, Who can be a participant? ) 5 See Notice 2013-17. 6 2014 monthly limit is 1/12 of the annual maximum of $3,300 (single HDHP coverage) or $6,550 (family HDHP coverage). 7 IRS Notice 2005-8 addresses the tax treatment of HSA contributions made for partners in a partnership or more-than-2% shareholders in an S corporation. 8 IRS Notice 2013-54 and several Affordable Care Act Implementation FAQs also address limitations for HRAs. 9 IRS Notice 2008-59 addresses corrective procedures. 10 A health FSA or HRA is an excepted benefit if the maximum employer contribution doesn t exceed $500 (or in the case of a health FSA, two times the employee salary reduction contribution, if greater) and other group health plan coverage not limited to excepted benefits (e.g., major medical or other coverage) is made available for the year to employees by the employer. 11 Family coverage categories include: EE+1 dependent, EE+2 dependents and EE+3 or more dependents. See the comparability rules in Treasury regulations sections 54.4980G-1 through 6. 12 In Field Assistance Bulletin 2004-1, the DOL found that HSAs are not subject to ERISA if the establishment of the HSA is voluntary on the part of employees, and the employer does not (1) limit the ability of the individual to move funds to another HSA beyond restrictions in the Code, (2) impose conditions on the use of HSA funds beyond those permitted in the Code, (3) make or influence investment decisions with respect to HSA funds, (4) represent that the HSA are a welfare plan established or maintained by the employer, or (5) receive any payment or compensation in connection with the HSA. 2014 Xerox Corporation and Buck Consultants, LLC. All rights reserved. Xerox and Xerox and Design are trademarks of Xerox Corporation in the United States and/or other countries. Buck Consultants is a registered trademark of Buck Consultants, LLC in the United States and/or other countries. BR12116 Health FSA-HRA-HSA Comparison Chart 9