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Why A Non-Traditional Health Plan Might Be Right for You

Employee Benefits

The availability of health insurance benefits at a prospective employer is a huge draw for employees, but traditional group and individual health options can be expensive and unwieldy. If you don’t know what you’re doing or what you’re looking for, you could be leaving money on the table for coverage that doesn’t quite fit your employees’ needs. Due to changing legislation, offering a consumer-driven health plan can potentially provide your employees with competitive health benefits while possibly saving you money. In a world of acronyms, knowing the difference between plan types can be challenging. Let’s define these popular alternative health insurance offerings.

What is a Consumer-Driven Health Plan (CDHP)?

A CDHP allows employers, employees, or both to set aside pre-tax money in order to help employees pay for qualified medical expenses not covered by their health plan. Examples of a CDHP include Health Savings Accounts and Health Reimbursement Arrangements.

What is a Health Savings Account (HSA)?

An HSA is an employee-owned account designed to work specifically with a qualified High Deductible Health Plan (HDHP) to allow tax-free payments of current and future qualified medical expenses. New legislation could further expand what medical expenses qualify for reimbursement via HSA. Employees, the employer, or both may contribute an amount up to their health care plan deductible, or the 2017 annual IRS limit of $3,400 for individuals and $6,750 for families (2018 limits are $3,450 for individuals and $6,900 for families), whichever is less. The maximum out-of-pocket for an HDHP in 2017 is $6,550 for individuals and $13,100 for families (2018 limits are $6,650 for individuals and $13,300 for families). Contributions are automatically deducted from employee paychecks every pay period and deposited into their individual HSA account. Any unused balances can be rolled over from year to year, continually growing through investment earnings and additional contributions. Employees can take their HSAs with them if they leave your company, but they would need to remain covered by an HDHP in order to contribute.

What is a Health Reimbursement Arrangement (HRA)?

Unlike an HSA, an HRA is employer-owned, works with integrated employer-provided health care plans, and is solely funded by the employer with tax-free, pre-tax contributions. Employees benefit from tax-free reimbursements of qualified expenses up to their annual plan deductible, or a limit determined by the employer. The employer also decides whether any unused funds can be rolled over from year to year. An employee cannot take the HRA with them if they switch jobs.

The 21st Century Cures Act, enacted on December 13, 2016, included provisions to allow small employers to use pre-tax money to fund HRAs to help employees pay for premiums of individual health plans. This new legislation enables small employers with fewer than 50 full-time employees or equivalents, and that don't sponsor a group health plan to fund employee HRAs, to help their employees pay for non-group plan health insurance premiums. This includes plans purchased on public health care exchanges under the Affordable Care Act (ACA).


What is the difference between an HSA and HRA?




Who funds the account?

Can be funded by employer, employee, or both.

Employer-funded only

What can I use if for?

Any otherwise un-reimbursed expenses are qualified as defined under section 213(d) of the Internal Revenue Code. Exceptions apply.

Employers may configure account to reimburse all or some un-reimbursed expenses as defined under section 213(d) of the Internal Revenue Code. Exceptions apply.

Can the employee take the account with them if they change jobs?




What is a High Deductible Health Plan (HDHP)?

An HDHP is a group health plan that features higher annual deductibles for single or family coverage than other traditional health plans. To be considered an HDHP in 2017, deductibles must be at least $1,300 for individuals and $2,600 for families. Depending on the HDHP and insurance carrier selected, the member may have the choice of using in-network and out-of-network providers. Using in-network providers will save money. With the exception of preventive care, the policyholder must meet the annual deductible before the plan pays benefits. Preventive care services are generally paid as first-dollar coverage or after a small deductible or co-payment. A maximum dollar amount may apply.

Enrollment in a qualified HDHP is required in order to make deposits into an HSA. For a high-deductible health insurance policy to qualify, the coverage, deductible, and annual out-of-pocket expenses must meet specific IRS guidelines.

What are the benefits of a Consumer Directed Health Plan (CDHP)?

CDHPs are an excellent way for employers and employees to reduce the cost of health insurance and save on social security (FICA) taxes.

  • Contributions are made pre-tax, reducing gross income and resulting in tax savings for the employer and/or employee, depending on the CDHP.
  • Unused contributions may be carried over to future plan years in terms of an HSA and at the employer’s discretion in the case of an HRA.
  • Distributions are tax-free for qualified medical expenses.
  • Any interest or earnings from account assets are also tax-free.
  • Certain CDHPs may be transferred between employers, making the ability to roll funds over from year to year even more valuable.

Having a solid understanding of the different types of health plans is the first step in ensuring you are offering the best insurance for your employees and your budget. You can weigh and price the options yourself, or contact a dedicated insurance representative to help you navigate the evolving healthcare offerings.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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