Plain version: a consumer-driven health plan (CDHP) hands the insured more direct control over health spending. It typically pairs a higher-deductible plan with a tax-favored account for health costs, such as an HSA, an HRA or an FSA. Compare managed care, where a gatekeeper PCP manages use of care instead of the consumer.
The four accounts: who puts money in?
- HRA (health reimbursement arrangement): the employer only.
- Health FSA (flexible spending arrangement): usually the employee, by salary reduction; the employer may also contribute.
- HSA (health savings account): the eligible individual or any other person, including an employer or a family member.
- Archer MSA (medical savings account): the individual or the employer, but not both in the same year.
Ownership differs too: an HSA is the individual's own account and stays with the person who changes jobs, while an HRA and a health FSA are employer-established plans.
HRA basics: an HRA must be funded solely by the employer, and the money cannot come through a voluntary salary reduction agreement. Reimbursements for qualified medical expenses are tax free to the employee. Self-employed persons are not eligible. An HRA may be offered with other health plans and does not have to sit beside a high deductible plan. Some, though not all, HRAs let unused amounts carry over to the next year. As the plan specifies, an HRA may reimburse health insurance premiums and long-term care coverage, which a health FSA cannot pay.
Who an HRA may reimburse, and how it can lose its tax break:
Allowed: current and former employees, their spouses and dependents, and the spouses and dependents of deceased employees.
If any distribution is or can be made for something other than qualified medical expenses, such as an unused balance paid in cash when an employee leaves, every distribution that tax year is included in income, even the medical reimbursements.
If the plan lets amounts go to a designated beneficiary other than the employee's spouse or dependents, any distribution from the HRA is included in income.
HRA plus HSA: an employee covered by a high deductible plan and a general HRA that pays qualified medical expenses from the first dollar generally cannot contribute to an HSA, because the HRA is disqualifying other coverage. Limited-purpose, suspended, post-deductible and retiree-only HRAs can keep the employee HSA-eligible.