Here's a health-care plan you can't afford to ignore
If you haven't heard much about Health Savings Accounts, which came into existence in 2004, it's time to listen up.
These plans could become the insurance coverage of choice for many small businesses and self-employed professionals within a few years.
Health Savings Accounts (HSAs) combine health insurance with a tax-deductible savings account for paying health-care costs. What makes HSAs potentially attractive is that they could be an option for small-business owners who have previously not felt they could afford to offer health insurance to employees.
For small businesses that already have high-deductible plans, Health Savings Accounts are a way of allowing employees and owners to have tax-advantaged medical accounts without having to go through the process of setting up a Flexible Spending Account.
Lessons learned from MSAs
Health Savings Accounts are the follow-up to the largely gone but unlamented Archer Medical Savings Account (MSA) plan. When Medical Savings Accounts first came into being, Congress said the plans would be restricted to the first 750,000 participants.
Congress needn't have worried. Small-business owners were turned off by the accounting, paperwork, and availability requirements and restrictions; the "ceiling" on participation was never even close to being threatened. Health Savings Accounts are in part an attempt to learn from the flaws of the Medical Savings Account program.
Here are five key features of Health Savings Accounts:
1. High-deductible health insurance coverage. HSAs are higher-deductible plans than many people may have dealt with previously. In order to qualify as an HSA, the plan has to include a deductible of at least $1,000 for individuals and $2,000 for families. HSAs with deductibles of $2,500 for an individual and $5,000 for a family are not unheard of.
2. A savings account for employees' out-of-pocket costs. The second part of the HSA scheme is the Health Savings Account itself.Employees can put an amount equal to their deductible — up to $2,650 for people with individual plans and $5,250 for those with family plans — into a Health Savings Account each year. People age 55 and older can add an extra $600. Health Savings Accounts may be set up with banks, brokerages, or other financial institutions, depending on the insurance company.
3. Deductible medical expenses for employees. The significant benefit for employees is that the money they put into their Health Savings Account qualifies as a tax deduction on their federal income taxes. There's no income limit or phase-out on the deduction.As long as the money is used for qualifying health-care expenses, there's also no tax on it when it's withdrawn.
4. The ability to roll over contributions. The ability to set aside money for medical expenses tax-free is a feature similar to that of Flexible Spending Accounts (FSAs). But unlike Flexible Savings Accounts, Health Savings Account contributions don't have any "use-it-or-lose-it" provisions.If the funds put in the Health Savings Account aren't used in one year, they can simply be rolled over to future years. And the money in an HSA can be invested, with the earnings or interest also being tax-free as long as it is taken out only for qualifying medical expenses.
5. Potential retirement funds. If an employee takes money out of an HSA for non-medical expenses, he or she will have to pay ordinary income tax on the withdrawal as well as a 10% penalty on the amount withdrawn. However, money taken out for non-medical expenses after age 65 isn't subject to the 10% penalty. In effect, for the very healthiest people, Health Savings Accounts can serve as another retirement account.
Tips for using HSAs effectively
You have to treat employees equally for Health Savings Account purposes. If you make a contribution for one employee, you have to make similar contributions in amount or percentage terms for all employees who qualify.
Ideally, employers could use Health Savings Accounts as a way to provide health benefits to their employees while potentially reducing costs to both employer and employee. For small businesses or self-employed individuals who already carry high-deductible plans, HSAs could be an attractive alternative: If you already have a high-deductible plan, the Health Savings Account essentially adds the benefit of a tax-deductible account to pay for non-reimbursed expenses.
For companies already offering health insurance, switching to a high-deductible plan could look attractive. But employees will rightly resist giving up a low-deductible plan if the alternative saves only the employer money.
An HSA option that includes a reduction in the share of premium being paid by the employee, a company contribution to the Health Savings Account, or some other design that saves money for employees as well as the employer, is likely to be looked upon more favorably.