Last updated on April 7th, 2025
Choosing a health benefits plan amid the numerous options and information available today can be an overwhelming task for both individuals and employers alike. Cost is of course an important factor when it comes to choosing a benefits plan—and one way to reduce or offset healthcare costs is by utilizing tax-advantaged programs.
Tax-favored health plans are designed to reduce taxable income for both employers and employees, saving money for both, while also fostering employee job satisfaction and improving retention rates.
Luckily, there are several health plans available that offer significant tax advantages. This article discusses four options for tax-favored health plans: Health Savings Accounts (HSAs), Health Flexible Spending Arrangements (FSAs), Health Reimbursement Arrangements (HRAs), and Section 125 (cafeteria) plans.
- Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a type of employee-owned savings account available to individuals enrolled in a high deductible healthcare plan. Holders of HSAs can contribute funds to this account for use on qualified medical expenses. Employers, family members, and others can also contribute on behalf of an eligible individual. Employer contributions may be excluded from the account holder’s gross income. Contributions to an HSA (other than employer contributions) are deductible on the employee’s tax return. All growth on HSA funds is also tax-free, as well as withdrawals. Unused funds roll over from one year into the next and belong to the employee for life.
- Health Flexible Spending Arrangements (FSAs)
A Flexible Spending Arrangement (FSA) is an employer-owned account that allows an employee to reserve pre-tax dollars for medical expenses. The employee decides on a fixed amount to contribute to the account tax-free from his/her salary. Employer contributions may be excluded from the employee’s gross income. Funds from FSAs do not typically roll over from year to year and are forfeited to the employer should the employee leave his/her job.
- Health Reimbursement Arrangements (HRAs)
A Health Reimbursement Arrangement (HRA) is an employer-funded plan through which employees are reimbursed for qualifying medical expenses. Employer contributions can be excluded from the employee’s gross income, and any reimbursements received by employees are tax-free. HRA funds may carry over from year to year depending on the employer and the specific plan. HRAs are not typically portable, meaning employees cannot take these funds with them when they leave the company.
- Section 125 (Cafeteria) Plans
A Section 125 plan, or cafeteria plan, is a type of employer-sponsored plan that allows employees to choose from a variety of pre-tax benefits. Under this plan, employees can choose between cash (a taxable benefit) and certain tax-free benefits such as health insurance or an HSA. Employees enrolled in a Section 125 plan opt to contribute a certain amount from their salary on a pre-tax basis to pay for qualified benefits. The benefits included in this plan apply to employees, their spouses, and dependents.
Deciding what health plans are right for your employees and business can be a challenge. You may want to consider taking advantage of these tax-favored plans as a means of maximizing tax deductions, saving money for both you and your employees.
As always, when it comes to tax matters, it’s in your best interest to speak with a tax professional. If you want to learn more about maximizing your tax deductions through tax-advantaged health plans, please don’t hesitate to give RBT CPAs a call.