Small Business Health Insurance: Understanding HSAs and HRAs

Both Health Savings Accounts (HSAs) or Health Reimbursement Arrangements Accounts (HRAs) can save you money on health insurance. But which is the best choice for your small business? To determine the real benefits of each, we called Carlos Ramirez (pictured), President of Fog City Insurance Services in foggy San Francisco.

ISBB: How do HSAs and HRAs offer more affordability vs. other health care premiums?

Ramirez: Health care premiums have been rising by 15 to 18 percent annually over the past few years. So it’s getting more difficult to find a rate that isn’t outrageously high. However, two types of plans – Health Savings Accounts (HSA) and Health Reimbursement Arrangement Accounts (HRA) – may be more affordable for two reasons.

First, their annual deductibles have been trending about 6 percent lower than traditional health care plans. Second, these accounts help you take more of the up-front risk by letting you partially pay for a health care plan up-front.

What are the benefits and differences of HSAs vs. HRAs?

An IRS Publication 502, Medical and Dental Expenses,  tells you everything you want to know about how to use your HSA dollars for a wide range of medical expenses, covering everything from asthma inhalers and body scans to dental treatments and x-rays on a tax-free basis.

A Health Savings Account, or HSA, is a tax-exempt trust or custodial account that employers or individual employees set up with a qualified HSA trustee to pay or reimburse certain medical expenses that you incur.

For example, if an employee opts for a $2,000 deductible annually with an HSA, the employer or employee may fund the money to that account. Even if that new employee should quit, the money is in the employee’s pocket the day after the HSA is funded.

Also, contributions to your HSA made by your employer may be excluded from your gross income.

When you combine the flexibility of an HSA with a lower premium, it will generally cost you less than the cost of the services that you actually incurred.

A Health Reimbursement Arrangement Account, or HRA, is a tax-advantaged, employer-funded medical reimbursement plan that allows both employees and employers to save on the cost of health care.

The employer sets aside a specific amount of pre-tax dollars for employees to pay for health care expenses annually. The money is paid by the employer towards an employee’s out-of-pocket expenses and annual deductible, so it provides a very flexible type of employee benefits plan. Based on the plan’s design, HRAs can generate significant savings in overall health benefits.

Mathematically, HSAs/HRAs are difficult to beat. The decision to not choose one is often emotional, not financial. Of course, check with your health care insurance agent to discuss your options for these and other types of accounts.

For more information about HSAs and HRAs, or to contact Carlos Ramirez, visit the Fog City Insurance Services website.