Account-Based Health Plans vs. Reimbursement Plans: Which Strategy Fits Your Client's Goals?

Introduction

As a benefits advisor, you know that one-size-fits-all health plan designs rarely serve your clients well. Small business owners and HR leaders increasingly recognize that how they structure their health benefits matters as much as which carrier they select.

Two architectural approaches deserve your close attention: account-based health plans (primarily HRAs and HSAs) and traditional reimbursement plans. While both can coexist, understanding their distinct advantages and limitations helps you guide clients toward decisions aligned with their financial goals, workforce demographics, and risk tolerance.

This guide breaks down both approaches from an advisor’s perspective—offering practical decision frameworks and real-world considerations to strengthen your client conversations.

Understanding Account-Based Health Plans

Account-based health plans fund employee health expenses through dedicated accounts rather than traditional claim processing. The two most common structures are:

Health Reimbursement Arrangements (HRAs)

An HRA is an employer-funded account that reimburses employees for eligible health expenses. The employer controls the account, funding it with a predetermined annual amount, and employees draw down funds as they incur qualified expenses.

Key characteristics: - Employer fully funds the account - Only employers can contribute - Funds can carry over year-to-year (with limitations) - Employer retains unused funds at plan year end - Can work alongside any health insurance plan - Requires a formal plan document

Advisor insight: HRAs are increasingly popular because they’re budget-predictable and flexible. In 2023, the IRS expanded HRA rules significantly, allowing employers to offer “excepted benefit HRAs” that don’t require minimum coverage standards—a game-changer for small employers seeking affordability.

Health Savings Accounts (HSAs)

An HSA is a triple-tax-advantaged account paired with a high-deductible health plan (HDHP). Both employees and employers can contribute, and funds roll over indefinitely.

Key characteristics: - Requires pairing with an HDHP (IRS-defined minimum deductibles and out-of-pocket limits) - Both employers and employees can contribute - Funds belong to the employee permanently - Unused funds accumulate indefinitely - Triple tax advantage (contributions, growth, and qualified withdrawals) - Portable when employees leave

Advisor insight: HSAs appeal to healthy, engaged workforces and younger demographics. They’re genuinely portable, making them attractive to employees concerned about job mobility. The 2024 contribution limit is $4,150 for self-only coverage and $8,300 for family coverage, with catch-up contributions available at age 55.

Understanding Reimbursement Plans

Traditional reimbursement approaches prioritize simplicity and claim-based administration.

Defined Contribution Plans with PPO/HMO Insurance

Under this model, employers fund a fixed amount per employee, and employees use that allowance with a traditional health insurance plan. Some employers use Dependent Care FSAs or Limited-Purpose FSAs as supplemental tools.

Characteristics: - Employer contribution is fixed and predictable - Employees combine employer funds with their own premium sharing - Claims process through the carrier - Limited portability - Simpler administration for micro employers - Higher employer costs for comprehensive coverage

Section 125 Cafeteria Plans with Dependent Care FSAs

While not direct health reimbursement, FSAs allow pre-tax employee contributions for dependent care and certain health expenses, reducing taxable income and effective premium costs.

Characteristics: - Use-it-or-lose-it annual limits ($3,200 in 2024) - Pre-tax contributions reduce payroll taxes - Employer savings pass through to employees - Requires careful education to prevent forfeiture - Works alongside any health plan

Comparing the Approaches: A Practical Framework

Cost Predictability

Account-based plans excel here. When you establish an HRA with a $2,000 annual employer funding level, costs are locked. Employees draw down funds throughout the year, and whatever remains stays with the employer at year end.

Reimbursement plans lack this predictability. Premium costs rise annually, and actual healthcare utilization may exceed projections, creating budget surprises.

Advisor recommendation: For clients with tight cash flow or board-level budget constraints, account-based plans provide the certainty they need.

Employee Retention and Engagement

Account-based plans, particularly HSAs, create psychological ownership. When employees watch their HSA balance grow, they feel invested in their benefits. This engagement can drive better health behaviors and lower claims over time.

Reimbursement plans feel more transactional. Employees see a premium deduction and use healthcare benefits as a black box.

Advisor recommendation: If workforce retention is a stated goal, emphasize the engagement factor of account-based designs.

Administrative Burden

Reimbursement plans are traditionally simpler—employees enroll, premiums flow through payroll, and the carrier handles everything.

Account-based plans require more setup: formal plan documents, education programs, communication about eligible expenses, and substantiation of claims. However, modern HRA platforms have reduced this burden significantly.

Advisor recommendation: Assess your client’s internal HR capacity. Smaller employers (<25 employees) may appreciate the simplicity of reimbursement; larger employers benefit from HRA administration software.

Workforce Demographics

Account-based plans work best with: - Younger employees (who value portability) - Healthier workforces (who can fully fund HSAs) - Stable, longer-tenure employees (who benefit from HRA carryover) - Higher-income employees (who maximize tax benefits)

Reimbursement plans serve well when: - Workforce is older or has chronic conditions - Turnover is high - Employees demand comprehensive coverage - Administrative resources are limited

Advisor recommendation: Request demographic data before recommending architecture. A manufacturing client with 20-year tenured employees has different needs than a hospitality operator with 30% annual turnover.

Hybrid Strategies: The Best of Both Worlds

Smart advisors often recommend hybrid approaches:

HRA + HDHP + HSA: Some employers fund an HRA for traditional medical expenses while employees still access HSA triple-tax advantages. This addresses both immediate healthcare costs and long-term savings.

HRA + PPO: An employer funds a modest HRA ($1,500) while employees carry standard PPO coverage. This reduces employee premium burden while maintaining plan predictability.

FSA + HRA: A dependent care FSA allows employees pre-tax dependent savings while an HRA covers medical costs the FSA cannot address.

Questions to Guide Your Client Conversations

Before recommending either approach, ask:

1. What’s driving this benefits review? (cost control, retention, recruitment, compliance?)
2. What’s your employee tenure average? (affects account carryover value)
3. What’s your workforce age profile? (younger = HSA-friendly; older = traditional coverage priority)
4. What’s your maximum acceptable employer cost increase? (account-based plans cap this)
5. How engaged is your workforce around health benefits? (accounts drive engagement)
6. What compliance resources do you have? (impacts administrative feasibility)

Implementation Considerations

Regardless of which approach you recommend, success requires:

• Clear communication: Account-based plans need education. Budget for enrollment meetings and ongoing Q&A.
• Robust documentation: HRAs require formal plan documents that comply with IRS rules. This isn’t DIY territory.
• Platform selection: Modern administration platforms make account-based plans manageable. Legacy systems create headaches.
• Ongoing compliance: Tax rules around HSAs, HRAs, and FSAs evolve. Annual reviews prevent costly mistakes.

Conclusion

Account-based health plans and traditional reimbursement approaches each solve different business problems. Account-based designs excel at cost predictability, engagement, and long-term sustainability. Reimbursement plans simplify administration and serve diverse workforce demographics.

The right choice depends on your client’s specific goals, workforce composition, and operational readiness. As an advisor, your role is connecting these architectural choices to their stated priorities—transforming benefits from a compliance checkbox into a strategic business tool.

---

Nexus Benefit Solutions is an independent employee benefits advisory firm based in West Michigan. Questions? Reach out at jason@nexusbenefitsolutions.com or call 616-425-9740.