An overview to designing FSAs, HRAs, HSAs, LSAs, rewards, & more for mental health
This year, roughly one in five American adults will experience a mental health condition. Many, however, will be unable to access needed care due to its high cost. Fortunately, mental health benefits offered by organizations like third-party administrators (TPAs) and specialty benefit providers seek to solve this gap in care.
A health spending benefit like a health reimbursement arrangement or a rewards program is a worthy addition to any mental health solution by providing members access to funds for behavioral health providers in and outside traditional provider networks. This guide will break down health spending benefits from the lens of designing a benefit for mental health treatment.
While there are many different health spending benefits, they can all be sorted into two categories: accounts that provide tax savings and accounts that do not offer tax savings. As you might guess, pre-tax accounts (or tax-advantaged accounts) are attractive to both participants and employer clients for their potential tax savings. Pre-tax accounts also have stricter regulations as the Internal Revenue Service (IRS) doesn’t just give away funds. Non-tax-advantaged accounts, on the other hand, offer greater flexibility with fewer regulations— but without any savings on taxes.
There are three main types of pre-tax accounts designed for qualified medical expenses (QMEs): flexible spending accounts (FSAs),* health reimbursement arrangements (HRAs), and health savings accounts (HSAs). Contributions to these benefits are considered tax-free (or pre-tax) as long as the account funds are used for qualified medical expenses.
*FSAs are technically arrangements, but are commonly referred to as accounts.
Unlike FSAs and HSAs, organizations can design general purpose HRAs to target specific member needs. This ability has earned it the nickname "specialty HRA," and made HRAs the favorite choice of organizations looking to design a benefit program that address for member out-of-pocket costs for mental health.
With fewer IRS guidelines, non-tax-advantaged accounts offer greater design flexibility to benefit plan designers. For our purposes, we’ll organize these accounts into two categories of programs: directed-spend programs and rewards programs.
"Directed spend" programs have different names in different industries. Employer benefits call them "lifestyle spending accounts" (LSAs), and Medicare Advantage plans call them "supplemental benefits." While sectors have given them different names, they all refer to a program where members are offered a spending account with spending controls.
It’s possible to offer more than one account to members. With a well-designed interface and benefits defined by software (not cards), a provider can stack benefits that offer tax savings and comprehensive care outside of regulations for expenses not considered medically qualified by the IRS (e.g., family counseling).
If you'd like to offer a pre-tax account, step one is familiarizing yourself with how the IRS defines “medical care” in U.S. Code § 213 - Medical, dental, etc., expenses
(1)The term “medical care” means amounts paid—(A)for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,(B)for transportation primarily for and essential to medical care referred to in subparagraph (A), - U.S. Code § 213
The IRS uses the U.S. Code Section 213(d) definition for medical care to determine which expenses are qualified medical expenses (QMEs) for pre-tax accounts. It’s important to note the emphasis given on “diagnosis, cure, mitigation, treatment, or prevention of disease.” Because of this definition, services like marital counseling are not considered a qualified medical expense.
In the table below, we used primary sources to identify common expenses for mental health and whether they are considered a qualified medical expense. A helpful resource is https://fsafeds.com/, which is sponsored by the U.S. Office of Personnel Management and administered by HealthEquity, Inc for federal employees.
Note: LMN = Letter of Medical Necessity
Here are some questions we commonly address when partnering with organizations looking to design a health spending benefit to address out-of-pocket mental health expenses.
Is therapy considered a qualified medical expense? Because they don't address diagnosed medical conditions, the IRS generally does not consider relationship counseling and life coaching qualified medical expenses.* However, therapy or behavioral counseling may be considered a qualified medical expense if they're used to alleviate or prevent a physical or mental disability or illness. For example, weight loss counseling may be considered a qualified medical expense when given as an evidence-based treatment for a diagnosed condition of obesity.
For this reason, it’s considered a best practice for organizations to require a letter of medical necessity (LMN) from mental health providers for counseling services. LMNs should include the following:
*non-qualified expenses can still be supported with a directed spend or rewards program
Who’s administers the claims? HRAs are employer arrangements where the member (employee) is reimbursed for qualified expenses. Administering claims can be done on two tiers:
Here’s a potentially helpful way of looking at mental health expenses and health spending benefits.
Providing a health spending benefit to your members is a very exciting solution but can also be daunting. But with the help of some experts and tech-friendly solutions, it can be accomplished with minimal stress. And we'd love to help! We build software tools and APIs that enable organizations to design, launch, and manage all pre-tax accounts, directed spend accounts, rewards, and supplementals.. We power the “health wallet” for all healthcare spending, acting as a single touch point for any consumer healthcare transaction. In our work, we leverage modern engineering advances and human-centered design principles to offer the most advanced solution on one card, app, and API.
For those interested, we created a similar guide to designing and offering a health spending benefit for fertility expenses.