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MSAs HRAs, and HSAs

Which health plan is right for my small business?

by Tony Novak, CPA, MBA, MT
, revised 11/30/2011

Note for 2014: I recommend a flexible benefit plan design that accommodates a combination of tax-free and after tax health benefits as allowed under the Affordable Care Act and prior law without the need to revise the benefit plan documents as tax regulations continue to evolve.

Three types of consumer-driven health plans now compete for the attention of small businesses and self-employed individuals: Medical Savings Accounts (MSAs), Health Reimbursement Arrangements or Health Reimbursement Accounts (HRAs) and Health Savings Accounts (HSAs). All of these plans are relatively new methods to improve the financing of health care expenses. Each type of health plan has the potential to significantly reduce overall health care costs and improve the level of satisfaction with health benefits. Yet the health plan needs of self-employed people and small businesses vary widely. Understanding the basic features of each of these types of new health plans will enable each business operator to pick a plan that will provide the best benefits.

The phrase “consumer driven” means that medical care spending decisions for routine health care are made at the individual employee/consumer level rather than as business purchase decisions. The financial effects of those day-to-day health care purchase decisions – whether positive or negative – are felt by the individual employee rather than the business or health maintenance organization. The net effect of converting to a consumer-driven health plan is that costs are lower and employee satisfaction is higher.

This article omits discussion of several other types of health plans available to small businesses and self-employed individuals. These are:

1) Fully insured health plans – Traditional health plans have low deductibles and no financial incentive for consumers to conserve spending. These are fading in popularity due to high cost and intolerance with health insurance company claims handling procedures.

2) HMOs – managed care plans standardize many medical care decisions at the organizational level and are based on exactly the opposite design theory of consumer-driven health plans. HMOs are to socialism what consumer-driven health plans are to capitalism.

3) Section 125 Flexible Spending Account (FSA) Plans – these are typically used to provide a variety of employee benefits beyond health plans. While these plans can be very effective and popular in a business, the advantages are not primarily in the area of providing pure health benefits. With the introduction of HRAs and HSAs, FSAs are now outdated in terms of providing health benefits for most Americans because they are the only health plan with the unpopular “use it or lose it” feature.

Medical Savings Accounts (MSAs) have been available to small businesses since 1996 but few have taken advantage of them. The primary reason was the difficulty in finding MSA-qualified health insurance. Less than 100,000 small businesses use MSA plans today. MSAs will no longer be started after December 31, 2003 and eventually those existing plans will convert to another type of more attractive plan.

Health Reimbursement Arrangements (HRAs) were introduced in 2002 and have become the plan of choice for small and mid-sized firms for providing health benefits to employees. There are many strong advantages to these plans detailed in other recent articles. Many of these plans utilize a business bank account debit card that is held by the individual employees to pay for routine health care expenses; hence the name “Health Reimbursement Accounts” has become more popular among promoters of these plans. For more information online, see

Health Savings Accounts (HSAs) will debut in 2004. These plans will essentially take over the market for healthy self-employed individuals, small businesses and healthy individuals who buy their own health insurance. HSAs are far superior to MSAs, and most MSA owners will want to convert as soon as HSAs become available. For more information online see

The attractive features that all three of these health plans have in common include:

1) Use low cost health insurance plans with high deductibles

2) Allow a carry-over of unused funds from year-to-year by the employee

3) Financially reward employees for making conservative spending decisions

4) Make available 100% coverage tax-free health benefits

5) Allow liberal preventative care, alternate care, vision and dental care benefits

6) Bypass and eliminate insurance for most routine health care

7) Allow tax-deductible deposits and tax-free withdrawals.





Primary Advantages

May be funded by either the employer or the employee (but not both)

Unrestricted insurance options  

May be completely uninsured

Cost is most easily controlled by the business

Unlimited maximum benefits

High level of employee satisfaction

Available to individuals and any business

Lower insurance policy deductibles than MSAs

Higher tax-deductible contribution limits than MSAs

May be used for long term care insurance

Primary Disadvantages

Only available to self-employed persons and small businesses

Severe restrictions on health insurance allowed

Few account trustees or health insurance providers

Not popular with employees

Funded only by the employer

Voluntary employee contributions are not allowed

Restricted benefits for owners of S corps., partners or sole proprietors

Independent claim verification required

Higher administrative cost for very small companies

May be difficult to merge with firms that offer only traditional health plans or HMOs  

For individual or family plans, currently only healthy applicants will qualify

Best-Suited Use

Self-employed individual

Employees of small or mid-sized business

Anyone enrolled in the HSA qualified high deductible insurance

Total Annual Administrative Cost




1 Includes the total estimated cost of all set-up and administrative functions for a full year for one person or family. Fees are usually waived for plans that are combined with health insurance.

2 Includes the total estimated cost of all set-up and administrative functions for a full year for a business with 5 employees based on a total cost to the business of $650.

When designing benefits for a small business, it is not necessary to choose one of these health plans exclusively over another.  It is possible and usually desirable to mix and match benefits for the best overall result. A small business with an HRA plan, for example, may also offer a FSA plan to employees and often provides the owner with health insurance outside the HRA plan and allows an HSA account as well.  In most cases the best results can be achieved by combining two health benefit plan designs, possibly even overlapping and incorporating retirement plans and other fringe benefits.

Finally consider that each of these plans has the effect of reducing overall health care costs immediately, but none are proven to have any effect on the real underlying long-term problem of hyperinflation in health care costs. At this point, unfortunately, a small business still needs to budget an annual spending increase of more than 12% per year just to maintain the same level of health care into the future. Obviously this issue must also be addressed, but that is far beyond the scope of this article.

In summary, the HSA will likely become the plan of choice for self-employed individuals (including owner/employees of most businesses) and the HRA is the most attractive way to provide health benefits to employees.

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