Plan Designs
HRA / HSA / FSA
| Issues | Health FSA | HRA | HSA | CONCLUSION |
| Internal Revenue Section | 105,106 and 125 | 105 and 106 | 223 | |
| Coordination of different plans | Can have an FSA & an HRA but does not coordinate as well with an HSA | Can have an HRA and an FSA but does not coordinate with an HSA | If eligible for an HSA, the high deductible nature of the FSA and HRA must be preserved. Only a limited use FSA or an FSA with a high deductible is available. The HRA must have a high deductible. | HSA plans reduce the effective use of other types of plans. |
| Penalties For Non-Compliance of rules | Must pay excise on the excess amounts over benefits test | Excess payments to Highly Compensated employees become taxable. | Employers violating this rule pay a 35% penalty of all HSA contributions they did make. | |
| Is a high deductible plan required? | No | No | Yes. Definition: Individual coverage. Must have an annual deductible of at least the annual IRS limit, and an annual out-of-pocket expense limit (deductibles, co-payments and other amounts, but not premiums) of not more than the current year limitation. Family coverage. Must have an annual deductible of at least the annual limitation and an annual out-of-pocket expense limit (deductibles, co-payments and other amounts, but not premiums) of not more than the annual limitation. No amounts may be payable from the plan until the family has incurred annual covered medical expenses in excess of the minimum annual deductible. | HSA requires the use of a High Deductible Health Plan (HDHP) while other programs do not have that requirement. |
| Medical expenses that are eligible for reimbursement |
Otherwise unreimbursed. Code Section 213(d) & 105, medical expenses incurred during the coverage period. Cannot reimburse insurance premiums. Cannot reimburse qualified long-term care services. |
Otherwise unreimbursed Code Section 213(d) & 105, medical expenses incurred while coverage in effect, including premiums for eligible health insurance. | Otherwise unreimbursed. Code Section 213(d) medical expenses incurred while coverage in effect, but not expenses for insurance other than premiums for COBRA, a qualified long-term care contract, or for a health plan while the individual is receiving unemployment compensation. In addition, premiums for Medicare and retiree medical may be reimbursed. | HRA and HSA have ability to pay for long term care policies while the FSA does not. |
| Cash-outs of unused amounts (if no medical expenses) | Not permitted | Not permitted | Permitted, but such amounts are taxable and subject to a 10% excise tax. | |
| 12 month period of coverage & prohibition of mid-year changes | Applies | Does not apply | Does not apply | HSA and HRA may be adjusted during the plan year. |
| Health FSA Uniform coverage requirement | Applies. Maximum amount of coverage must be available throughout coverage period (generally 12 months) | Does not apply. Coverage level may be prorated by plan design or maximum amount may be provided. | Does not apply | Terminating employees will not be able to draw full annual amounts under the HRA and HSA. The FSA will advance. A claim early in the year may cause a cash flow problem for an employee under the HRA or HSA plan. |
| Ability to spend down unused amounts after termination of active participation | May permit amounts to pay for claims incurred after termination; but not required for COBRA rights Small carry forward is available. | HRA can permit unused amounts to be used until depleted to pay for claims incurred after termination; and COBRA rights will apply also. | Subject to certain restrictions, can permit unused amounts to be used up even after termination or retirement. | |
| Claims must be incurred during current period of coverage | Applies | Claims incurred but not reimbursed in an earlier period while the individual was a participant can be reimbursed in subsequent year if individual still a participant | Does not apply | HRA and HSA allow for unused funds to be carried over to next plan year. |
| Expense substantiation | Required | Required | Not required by trustee, custodian or employer. Individual must justify to IRS. | For a tax audit the individual must provide records. FSA or HRA the plan sponsor must provide the records. |
| Claims Adjudication | Required | Required | Not Required | In a HSA employee may be tempted to spend money on expenses that are not eligible due to loose rules regarding claim payment. |
| Ordering Rules | Required. Generally, health FSAs must be payers of last resort, but plan may be drafted to allow health FSA to pay first. | Generally, health FSA must be payers of last resort, but can draft HRA and health FSA plan documents so HRA pay only after health FSA amounts are exhausted | In general, an individual is not eligible to have an HSA if, while covered under a high deductible health plan, he or she is covered under any other health plan (including a HRA or Health FSA) which provides coverage for any benefit which is covered under the high deductible health plan. | Can have problems with the HSA if a spouse is covered by a non-high deductible plan. Not an issue with FSA or HRA plans. |
| Non discrimination rules |
Applies – Under Sections 105 & 125 25% to Key vs. Non-Key |
Applies under Section 105. | Does not apply, but if employer makes contributions, comparable contributions must be made for comparable participating employees. Uniform contributions. Employers violating this rule pay a 35% penalty of all HSA contributions they did make. | |
| Is a trust account required? | No. Not by the code, but possibly by ERISA (no trust if Health FSA complies with ERISA Tech Release 92-01. Including that reimbursements are made directly out of the general assets of the employer) | No, not by the code, but possibly by ERISA (no trust if HRA reimbursements are made directly out of the general assets of the employer) Funded Plans – Yes, Unfunded – No | Yes, or custodial account | |
| Are account earnings taxable? | Not applicable if reimbursements are made directly out of the general assets of the employer and account funds are not set aside in a separate account. If funded with a VEBA, earnings are generally not taxable. | Not applicable if reimbursements are made directly out of the general assets of the employer and account funds are not set aside in a separate account. If funded with a VEBA, earnings are generally not taxable. | Not if there is a qualified HSA trust or custodial account. | |
| ERISA ISSUES (For covered Employers) | ||||
| Funding Requirement | Not required. There is no requirement to set funds aside in a separate account; but if an employer does so, ERISA’s trust requirement may apply | Not required. Employers may decide to fund (i.e. set aside funds) as potential liability increases. But any such funding may invoke ERISA’s trust requirement if amounts are segregated from general assets. | Employer and employee HSA contributions required to be put in trust or custodial accounts. The employer must make the “same contribution” meaning the same dollar amount or the same percentage of deductible. | |
| ERISA plan asset issues | Even though a plan may be treated as “unfunded” under ERISA Tech. Release 92-1, salary reduction amounts are plan assets for purposes of ERISA’s exclusive benefit and fiduciary duty rules | Generally, no plan assets unless funded (i.e., generally no plan assets if all reimbursements paid directly out of general assets of employer) | For plans with employer contributions, generally employer and employee contributions would be plan assets once placed in HSA trust or custodial account. | |
| ERISA Form 5500 | Applies. Exception for small (fewer than 100 participants) unfunded plan. | Applies. Exception for small (fewer than 100 participants) unfunded plan. If assets are contributed during year and in excess of claims a 5500 may be due. | Applies if there are employer contributions to the HSA trust or custodial account. | |
| Plan Design or Compliance Issue | ||||
| ERISA Summary Plan Description and other disclosures, and adherence to ERISA’s benefit procedures | Required | Required | ERISA requirements may apply if there are employer contributions. But claims are generally self-reported and self-adjudicated, so claims procedures should not apply. | |
| Claims Processing | Required | Required | No requirement of formal claims. Owner must prove to IRS that withdrawals are for medical expenses. | |
| Contribution Limits | Limits must set by plan Maximum deferrals are set each year by IRS. See Cafeteria brochure for current limit. | There are no maximum limits. | Set each year by the IRS based on individual or family accounts. | |
| Catch-Ups | Not Applicable. Permits plan limit | Not Applicable. No employee contributions. | Eligible if participant turns 55 on or before Dec. 31 during the year. | |
| Portability, certificates of creditable coverage, and health status nondiscrimination | Applies. Exception for most health FSAs funded with salary reductions. | Applies. Health FSA exception generally not available. | Does not apply to employer-funded-self-administered HSA or to HSAs receiving no employer contributions. Would apply to HDHC component and HSAs that are not self administered. | |
| COBRA | Applies. There is a special rule for qualifying health FSAs. | Applies. Special rule for qualifying health FSAs generally not available. | Does not apply to HSA component. May apply to HDHC component |
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