Nyhart - Tax Favored Plan Comparison

Flexible Spending Links

Tax Favored Plan Comparisons

The IRS has approved several methods of paying for health care expenses on a tax-favored basis, outside the traditional group health plan.

Section 125 Flexible Spending Accounts ("FSA's") have been in widespread use for many years and provide a fairly straightforward way for employees to pre-fund on a tax free basis medical, dental, and vision expenses not covered by their group health coverages.

Health Reimbursement Arrangements ("HRA's") also permit contributions to carry over from year to year. The most significant restrictions on HRA's is that only employer contributions are permitted.

Health Savings Accounts ("HSA's") became permissible in January 2004. They have received a lot of attention because, unlike FSA's, contributions can be carried over from year to year. Both the employee and employer can contribute to the HSA on a tax favored basis. However, a number of conditions apply to HSA's (among other things, they must be linked to a high deductible health plan), which means plan design and administration of HSA's can be complex.

		Health FSA	HRA	HSA
1.	Who may contribute?	Employer or Employee	Employer Only	Employer or Employee
2.	Self-Employed / Partners eligible?	No	No	Yes
3.	Retirees eligible?	No	Yes	Medicare entitled may not contribute, but may receive benefits. Those who are eligible for but have not elected Medicare may contribute.
4.	Maximum contribution amount?	None - established by employer	None - established by employer	Lesser of: Deductible and $2,900 (single) or $5,800 (family)
5.	Health plan requirement?	None	None	Must enroll in HDHP w/minimum deductible of $1,100/$2,200 and maximum out-of-pocket of $5,600/$11,200
6.	Does spouse's coverage impact eligibility?	No	No	Yes
7.	Is there a mandatory coverage period?	12 Months	No	Monthly
8.	Are mid-year changes in contribution allowed?	Only with change in status event	Yes, by coverage period	Yes
9.	Intermediate access to annual pledge?	Yes	No	No
10.	Carryover of unused amounts?	No	Yes	Yes
11.	Is balance portable?	No	If permitted in plan provisions	Yes, to another HSA
12.	What expenses are eligible?	IRC § 213 medical expenses, other than premiums	IRC § 213 medical expenses, including premiums	Medical and non-medical expenses (non-medical are taxed); premiums limited to COBRA, LTC and Medicare supplement
13.	May employer limit type of medical expenses being reimbursed?	Yes	Yes	No
14.	Substantiation of claims required?	Yes	Yes	Yes, account holder maintains records
15.	Includable in cafeteria plan?	Yes	No	Yes
16.	Trust/custodial account needed?	HRA - Yes HSA - Yes, with limits*	FSA - Yes HSA - Yes, with limits*	FSA - Yes, with limits* HRA - Yes, with limits*
17.	Coordination with other accounts	No	No	Yes
18.	Nondiscrimination rules apply?	Yes, IRC §§ 105(h) and 125	Yes, IRC §105(h)	Yes, IRC §223
19.	Contributions deductible by employer?	Yes	Yes, IRC §105(h)	Yes
20.	Subject to FICA?	No	No	No
21.	W-2 reporting requirement?	No	No	Yes
22.	Subject to ERISA?	Yes	Yes	No, if follow safe harbor (the HDHP is subject to ERISA
23.	Subject to COBRA?	Yes, if employee's contributions exceed reimbursements	Yes	No
*Health FSA and HRA must limit reimbursement to dental, vision and preventive, or reimburse only once high deductible is met, or defer to retirement (HRA only) 01/08

In some cases a company may choose to offer a combination of plans. For instance, an FSA and HRA. In this case, HRA reimbursements are made only after the FSA contributions are exhausted.

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