Not all defined contribution approaches are the same
With DC-like approaches to healthcare benefits becoming more common for active employees, it’s important to understand how they work. Three common approaches include HSAs, HRAs and RHSPs.
Health Savings Accounts (HSAs) can be funded by the employer and the employee.
The HSA is a medical savings account. In order to contribute to a HSA, the account holder must also be enrolled in a qualifying High Deductible Health Plan (HDHP). Further, a HSA is designed to help employees manage current healthcare expenses and most account holders spend their HSA balance each year making it difficult to accumulate savings for retirement.
Health Reimbursement Accounts (HRAs) are entirely funded by the employer.
The account can be established for both active employees or retirees. Generally, a retiree HRA will not provide long-term investments and the contribution is an annual “pay as you go” stipend that the retiree can use for premiums or other out of pocket medical expenses in retirement.
As a pay-as-you-go benefit, the annual stipend can represent a liability on the employer’s balance sheet. The annual stipend is often a fixed dollar amount and unless the employer increases the stipend over time, the retiree will bear the burden of increased healthcare expenses throughout retirement.*
Retirement Health Savings Programs (RHSPs) are an employer sponsored plan funded by the employer. The plan may allow employee funding on an after-tax basis.
Unlike the typical HRA, a RHSP is fully funded with contributions made throughout the working career of the employee.
The employee often has the option of selecting how contributions are invested among a series of mutual funds.
During the employee’s career, the RHSP resembles a 403(b) or 401(k) plan.
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In retirement, the RHSP provides a completely tax-free reimbursement account to pay for qualified medical expenses.