Plans
The underlying Flexible Spending Account (FSA), Health Reimbursement Arrangement (HRA), and Health Savings Account (HSA) are the three main components of today’s CDHP, with each plan offering its own benefits to the participant and governed by its own set of rules and regulations.
Flexible Spending Accounts (FSA)
Most companies are familiar with FSA plans, which allow employees to set aside pre-tax dollars to reimburse qualified health care related expenses. The FSA, funded by the participant and / or the employer, requires that 100% of the annual election be made available for qualified expenses on the first day of the plan year.
The flip side of this Universal Coverage Rule is the “Use-it or Lose-it” rule that forces the participant to forfeit any remaining account balance at the end of the plan year. This one aspect of the FSA plan has been stated as the primary reason for non-participation.
Health Reimbursement Arrangements (HRA)
Ever increasing in popularity, the HRA is typically linked to an HDHP as a way to provide an additional benefit to employees in the event of qualified medical expenses. The account, which is backed exclusively with employer dollars, is notational in that the employer provides reimbursement only when the employee incurs an expense.
The employer has the ability to design the plan to allow for a carryover from one plan year to another, which empowers the participant with multi-year accumulation potential.
Health Savings Accounts (HSA)
The newcomer on the block (enacted in December 2003), an HSA is an actual savings account maintained at a bank or other qualified institution, as opposed to a notational arrangement between the employer and the participant. The HSA can be funded by anyone – not just the account holder or the employer.
There is also no “Use-it or Lose-it” rule. Finally, the HSA funds can be used to pay for anything, although non-qualified expenses carry a tax penalty