Legislative initiatives in recent years have created several plans that use pre-tax dollars to fund some types of benefits. Structuring these plans so that you and your employees receive the intended benefit and avoid possible complications is what we excel at.

Flexible Spending Accounts (FSA) allow your employees to have some of their salary set aside on a pre-tax basis and used for medical expenses that are not covered by an insurance plan, or for care of dependents. FSAs are salary reduction programs that escape taxation at all levels, including the employer match of FICA and Medicare. Often used by employers for the employee share of their benefit cost and dependents insurance, FSAs can also include an employee salary reduction plan for non-reimbursed medical expenses allowed by the IRC Sec. 213(d) and dependent day care expenses if both spouses are working. Current FSA rules require that the money allocated to the plan be used within the plan year for qualified expenses or be forfeited. An exception now exists for the employee to allocate funds to an HSA account through an FSA plan and for those dollars to remain in the HSA account and accumulate.

Health Reimbursement Arrangements (HRA) are employer-funded and offer medical expense benefits to your employees. Employers use these plans in combination with high deductible medical policies to provide tax-free reimbursement of qualified medical expenses for enrolled members. HRA plans are fully funded by an employer. Generally, the concept is that by acquiring a higher than normal deductible medical insurance policy, the cost savings generated between the two policy options will provide the dollars for the HRA plan. Employers may dictate the valid expenses allowed for reimbursement by the plan. Employee account balances may be allowed to accrue from year to year but are generally forfeited upon termination of employment. Benefits received by employees are not taxed and are not considered part of their compensation.

Health Savings Accounts (HSA) were created as part of the Medicare Prescription Drug, Modernization and Improvement Act of 2003. HSA programs have the potential to revolutionize medical expense insurance programs in the future.

An HSA account requires that the individual be insured with a specially designed High Deductible Health Plan (HDHP). These plans can be provided by an employer as one of their medical insurance plan options (or their only medical insurance option), or by an individual medical insurance policy. The HSA account contribution is a pre-income tax event (and if done through an FSA plan also escapes FICA and Medicare tax). HSAs may be funded by an employer, an individual or both. Account contribution limits are dictated by the deductible level of the HDHP to specified limits that are subject to annual inflationary adjustments. Additional contribution levels are available to those aged 55+. Funding limits are based upon a calendar year basis. Account balances accrue from year to year and may be invested in any investment approved for an IRA account.

The individual account holder 'owns' the HSA account. This means that the account can be taken with an individual upon termination of employment and retained for future use or moved to another employer' s HSA program. HSA account reimbursements for qualified medical expenses (as defined by IRC Sec. 213(d)) are a non-taxable event. Payments from the HSA account for non-medical expenses are subject to normal income tax rules and a 10% excise tax for individual less than age 65.

To see comparisons between FSA, HRA and HSA plans, please click here.