And does it matter which I use for complementary or alternative medicine services?
As healthcare costs continue to rise, employers and employees alike are looking for ways to manage these expenses. One popular solution is the use of Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs), Limited Purpose Flexible Spending Accounts (LPFSAs), and Flexible Spending Accounts (FSAs). Each of these financial mechanisms provides different benefits and features, making it important for both employers and employees to understand the differences between them.
Health Savings Accounts (HSAs)
HSAs are tax-advantaged savings accounts that are paired with high-deductible health plans (HDHPs). They allow individuals to set aside pre-tax dollars to pay for eligible healthcare expenses, including medical, dental, and vision care. HSAs are owned by the individual and can be used to pay for qualified medical expenses for themselves, their spouse, and their dependents.
Employers can contribute to their employees’ HSAs, and these contributions are tax-deductible for the employer. Contributions made by the employee are also tax-deductible, and the funds in the account can be invested and grow tax-free. Additionally, HSAs have no “use it or lose it” provision, meaning that funds can be carried over from year to year.
HSAs also have a unique feature that allows for the use of complementary and alternative medicine services. While these services are not always covered by traditional health insurance plans, they are eligible for reimbursement through an HSA as long as they are considered a qualified medical expense by the IRS. This includes services such as acupuncture, chiropractic care, and naturopathic medicine, as well as many mental and behavioral health therapies.
Health Reimbursement Arrangements (HRAs)
HRAs are employer-funded accounts that are used to reimburse employees for eligible healthcare expenses. Unlike HSAs, HRAs are owned by the employer and can only be used to pay for medical expenses incurred by the employee.
Employers have more control with HRAs than with HSAs, as they can customize the plan to meet the specific needs of their employees. For example, an employer could offer an HRA that only covers dental and vision expenses, or one that has a higher deductible but offers more generous coverage for prescription drugs. Because it is a reimbursement process, there is no rollover of HRA funds.
Similar to HSAs, HRAs can also be used to pay for complementary and alternative medicine services that are considered qualified medical expenses by the IRS, if the employers chooses to include them in their plan.
Limited Purpose Flexible Spending Accounts (LPFSAs)
LPFSAs are a type of FSA that are designed to work in conjunction with an HSA. They can only be used to pay for eligible dental and vision expenses, making them a good option for those who have an HSA paired with an HDHP.
LPFSAs are funded through pre-tax payroll deductions, and the funds must be used by the end of the plan year. However, some employers may offer a grace period or carryover option that allows employees to use the funds into the following year.
While LPFSAs cannot be used to pay for complementary and alternative medicine services, these services may be eligible for reimbursement through an HSA if they are considered a qualified medical expense by the IRS.
Flexible Spending Accounts (FSAs)
FSAs are similar to HSAs and HRAs in that they allow individuals to set aside pre-tax dollars to pay for eligible healthcare expenses. However, unlike HSAs and HRAs, FSAs are owned by the employer and the funds must be used by the end of the plan year.
FSAs can be used to pay for a wide range of eligible healthcare expenses, including medical, dental, and vision care. This includes expenses such as co-pays, deductibles, prescription drugs, and medical equipment.
Complementary and alternative medicine services may be eligible for reimbursement through an FSA if they are considered a qualified medical expense by the IRS. This includes services such as acupuncture, chiropractic care, and naturopathic medicine.
Employers may offer a variety of FSA options, including a general purpose FSA or a limited purpose FSA that can only be used to pay for eligible dental and vision expenses.
Choosing the Right Option
When deciding which financial mechanism to implement, employers should consider the needs and preferences of their employees. For example, if employees value the ability to carry over unused funds from year to year, an HSA may be the best option. If employees prefer a plan with more employer control, an HRA or general-purpose FSA may be a better fit. A combination approach is becoming increasingly popular with employers.
Employees and their dependents should also consider their own healthcare needs when choosing a plan. Those who require regular medical care and have predictable healthcare expenses may benefit from an HSA paired with an HDHP, while those with more unpredictable medical expenses may prefer an HRA or general purpose FSA.
When it comes to using complementary and alternative medicine services, individuals should check with their plan provider to determine which services are eligible for reimbursement. Leveraging an HSA is a very effective way to offset the cost of these valuable services, typically saving between 30%-33% over paying out-of-pocket for the same service. If using HRA, FSA, or LPFSA for these services, be sure to check first that your employer has included them in your plan, and remember to keep detailed records of any expenses incurred for these services in order to ensure proper reimbursement.
In conclusion, HSAs, HRAs, LPFSAs, and FSAs can all be effective ways to manage healthcare costs for both employers and employees. Each option offers unique benefits and features, and the ability to use these funding mechanisms for complementary and alternative medicine services is a powerful way to make them more financially accessible. By understanding the differences between these financial tools and carefully considering their healthcare needs, both employers and employees can make informed decisions that lead to better health outcomes and financial savings.