High-Deductible Plans Can Provide Tax Savings
George Morris is president of Morris Financial Group in Salem and legislative chairman for the Western Reserve Association of Health Underwriters.
Let’s start with health reimbursement arrangements. They are employer-funded health care accounts that reimburse employees for eligible out-of-pocket medical expenses on a tax-favored basis.
Health Reimbursement Arrangements (HRA) are often paired with group plans that have high deductibles in order to help employees pay out-of-pocket medical expenses. This gives a tax-favored benefit to both the employer and employee, as the employer takes a deduction for HRA contributions and the funding received by the employee is considered tax-free. As with many tax-favored benefit plans, compliance and testing is required to assure that no individuals or group of employees are discriminated against.
Once established, an employer can reimburse for any qualified medical expense. The employer may also choose to be restrictive on what the plan will reimburse. Many employers will have a third-party administrator to substantiate a claim is valid. The administrator will generally provide the plan document outlining how the plan operates and what expenses are eligible for reimbursement. Each employee must be given a summary plan description.
In general, HRA plans are only coupled with a group health insurance plan. Proposals by President Donald Trump, not yet enacted into law, would give employers the ability to use HRA funds to reimburse for individual health policies.
Health Savings Accounts (HSA) are tax-favored accounts funded by either the employer or employee coupled with a high deductible health plan. HSA dollars can be used to pay out-of-pocket expenses (deductibles and co-insurance) billed by your doctor, hospital or pharmacy. If any HSA funds are used for non-medical expenses, the amount used is taxable as income and generally subjected to a 20% penalty.
Contributions made to annual limits are done on a pre-tax basis. All account growth and earnings are treated as tax-deferred. Lastly, all withdrawals used to fund qualified medical expenses are considered tax-free. This triple tax benefit of HSAs is highly effective when used properly. In addition to tax benefits, employers and employees generally enjoy lower health insurance premiums when combining the HSA with a high deductible health plan.
Typically these plans will see higher deductible and out-of-pocket limits than preferred provider organization plans. The main reason is HSA/high-deductible plans have no first dollar benefits or co-pays. All qualified medical expenses are first paid by the employee up to the deductible amount. Proper planning and employee education is vital when transitioning from a PPO plan.
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