Employees select an annual amount of money that the employer deducts from their paychecks before tax, and that amount is deposited into an account typically managed by the employee and a third-party administrator.

The single biggest drawback of the FSA for employees is the “use it or lose it” rule. Generally speaking, the end-of-year balances of FSAs don’t roll over, so the money employees don’t spend over the course of the year is lost to them. In this way, the FSA scenario is similar to traditional healthcare—the user pays a certain amount without necessarily incurring equal medical costs. This is the least attractive feature of the FSA and sets the stage for the CDHP’s “use it or keep it” value proposition.

Typically, an HRA is paired with a lower premium, higher deductible health plan, and the employer funds an HRA to help employees pay some portion of the deductible—usually 50 percent or more. For example, an employer may agree to cover up to $750 of a $1500 deductible. The employee is responsible for any expenses that are over this credit but below the deductible: the remaining $750. The employer doesn’t have to pay into a fund for reimbursement, but reimburses medical costs as they occur. Any money the employer actually spends is treated like a health insurance premium and is tax deductible.

Employees can’t contribute to HRAs themselves, but they can participate in that eligible healthcare expenses that are not paid for by HRA can be covered by an FSA at the same time on a tax-preferred basis, once their HRA funds are exhausted.

An important consideration for employers is how much HSA funding they will provide, and how often. The employer determines how much they can afford to contribute to employee HSAs, and then decides whether lump sum, monthly, quarterly, or annual funding is most appropriate. By working with their Benefits Advisor, the employer can determine the portion of their premium savings that should be re-invested into their employees’ HSAs, and then look at their cash flow to determine the ideal frequency of funding.

Employers need to consider their employee turnover rate before setting their HSA contribution strategy. Because the HSA is an employee asset, regardless of who funds the account, the money in it is permanent and belongs to that employee. If your employee turnover rate is high, you may want to consider monthly funding to reduce the risk of having terminated employees walk away with HSA dollars. Employers must also take an employee’s financial means into account and should strongly consider creating an HSA funding strategy based on income, which is permitted by IRS law.

Although somewhat more complicated, the IRS permits employers to reverse discriminate and provide a greater level of funding for lower-paid employees. The IRS also allows employers the opportunity to provide a hardship provision, which allows employers to advance committed HSA funding to employees who experience a significant healthcare event during the year before regularly scheduled HSA contributions are available to them. This provision must be applied uniformly to all employees, and gives employers added flexibility where and when it is needed most.