One of the changes enacted with the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was the establishment of Health Savings Accounts (HSAs) -- tax-free money shelters designed to help people pay for their health care costs. But while the accounts clearly offer employees a viable option when it comes to preparing their pocketbooks for medical crises, they also give small-business owners a way to keep their health care benefit costs down while still rewarding employees.
The HSA legislation allows employers and employees to make pre-tax contributions into a savings account that is designed specifically for medical costs. As with a 401(k) plan, monies from the HSA that are used for other reasons are taxed and penalized. Monies that are unused can be transferred from year to year, and employees who switch jobs can take an HSA with them. Money from the account can even be used tax-free after retirement as long as it is being applied toward eligible medical costs, such as doctor's appointments, prescription drugs, health-insurance premiums and COBRA payments. The maximum annual contribution for individuals is $2,600 and for families is $5,150. People between the ages of 55 and 65 can make "catch-up" contributions of up to $1,000 per year.
However, in order for an HSA to be used, it must be combined with high-deductible health insurance -- that which carries a deductible of at least $1,000 for an individual and $2,000 for families. Since the legislation allows for annual contributions of up to 100 percent of the deductible, the higher the deductible, the more money people can sock away in an HSA. Therein lies the biggest financial benefit for small-business owners.
The bottom line is that high-deductible health insurance plans cost less. A health insurance plan with a deductible of $1,000 per year provides that the recipient agrees to pay the first $1,000 of health care coverage before the insurance company picks up the cost. The premiums for such an insurance plan would be lower than one that carries a $250 deductible since people are more likely to incur $251 worth of health care costs per year than $1,001. A business owner who offers high-deductible health insurance plans will save money over one who offers low-deductible health insurance plans.
HSAs are specifically designed to give people a fund from which to take the money to pay their deductible should they need health care services in a given year. So small-business owners who offer to contribute to HSAs for their employees can save money by also offering high-deductible health insurance plans rather than low-deductible health insurance plans. Even if business owners want to give their employees the choice of high-deductible insurance vs. low-deductible insurance, the HSA benefit increases the likelihood that more employees will choose the high-deductible insurance since they'll be saving money on the part of the monthly premiums that they pay, as well.
Not only can small-business owners use HSAs to keep their overall health plan spending down, but they can get a tax benefit as well since the money that is contributed to HSAs is not taxed.
To set up such an account, business owners must first find an insurance company that offers HSA-qualified health insurance policies. Since the law just went into effect, companies are still ironing out the details of whether or not they will offer such insurance and what the specific costs of doing so will be.
The success of the HSA legislation ultimately depends upon the product offerings of the health insurance industry, as more and more companies jump on the bandwagon when it comes to tailoring HSA-qualified plans to their clients' needs. Lawmakers who voted for the law did so with the hope that it would save money in overall health care costs. Small-business owners should consider the plans as a way to take advantage of that potential windfall.