The Alphabet Soup of Employee Benefits

Nearly every industry has their “Terms of Endearment”, otherwise known as acronyms.  Employee benefits is no different.  But, if you don’t live in it, like we do, the long list can make your head spin. 

Some of the most common come from the Internal Revenue Service (IRS), probably the most well-known acronym around.  This department created several funding arrangements to help individuals pay or reimburse certain medical expenses with tax-exempt dollars.  Here’s a brief rundown of the most common ones.

HSA:  Health Saving Account.  Often misspelled because of spell checker, the money put into this account belongs to the individual and stays with that person regardless of their work situation.  It can be funded by the employee or employer or both. 

The accounts have contribution limits and must be tied to a HDHP (High Deductible Health Plan).  These limits are reviewed annually.  New guidelines for 2013 were recently announced.  There are several tax implications that users should be aware of.  Talk to your advisor for more information.

MSA:  Medical Savings Accounts.  Very similar to the HSA.  The primary difference is the target audience: self-employed individuals and small employers.  These are still around on a limited basis but, for the most part, they have been replaced by the more popular HSA.

FSA: Flexible Spending Arrangements.  This is an employer-established benefit plan.  Both the employee and employer can contribute funds and has the added advantage of being tax-free.  Watch out!  This is a use it or lose it proposition so plan carefully if you take advantage of this.  Any or no health plan is eligible, though self-employed persons are not.  And, there may be limitations to highly compensated or key employees.

HRA:  Health Reimbursement Arrangements.  This is also an employer-established benefit plan, with a different twist.  Only the employer is allowed to contribute funds.  Qualified distributions are still tax-free and, like the FSA, can be offered with any or no health plan.  HRAs are a good step toward self-funding and are a great strategy to lower health insurance premium costs.

The letters may be different, but what the above acronyms have in common is that the money in the accounts can be used to pay for things insurance does not, such as co-pays, deductibles, even items or procedures not covered – as long as it’s a qualified medical expense.  Not sure what qualifies?  The IRS helps us out with their guidelines. 

These funding arrangements are a creative way to increase your staff’s income and can effectively lower your health insurance costs at the same time.  Talk with your advisor about the tax implications and to see if any are right for you.