Health Savings Accounts for Healthcare Spending Give Small Business Owners Creative and Innovative Options
For the past two decades, the cost of providing health care for employees has ranked as the No. 1 concern of small-business owners across America, according to surveys conducted by the NFIB Research Foundation. In 2004, it remained No. 1—this time by its widest margin ever, with nearly two-thirds of respondents calling it their greatest concern.
With healthcare costs continuing to rise, an increasing number of employers are looking for innovative ways to stretch their healthcare dollars. This includes market-driven reforms aimed at empowering individuals and employees to become better consumers by giving them the freedom to choose how they are spending their healthcare dollars.
The primary tools available to small business owners, their employees and their families include health savings accounts, health reimbursement arrangements and flexible spending accounts. These plans provide the consumer with the choice to control and spend healthcare dollars as they see fit.
Health savings accounts
An HSA is a tax-free savings account for medical expenses that allows an individual (or family) to pay for current healthcare expenses while saving (tax-free) for future medical expenses. An HSA must be used in conjunction with a high deductible health plan, which is typically available at a lower cost than traditional healthcare coverage.
In 2006, any taxpayer with an HDHP can contribute up to $2,700 a year ($5,450 for families) into an HSA account. The amounts are indexed for inflation. Both employers and employees can contribute funds to an HSA account.
HSAs are a departure from the traditional healthcare system that many employers and employees have grown accustomed to over the years. However, as more and more consumers come into the HSA marketplace, many have seen substantial savings over traditional healthcare plans.
Like individual retirement accounts, individuals are not penalized if they use the HSA funds to pay for qualified medical expenses. In addition, the unused funds in an HSA can be rolled over if they are not used by the end of the year. Those funds remain available to be used for qualified medical expenses in the future.
NFIB is a member of the Steering Committee of the HSA Working Group. The HSA Working Group is a coalition of employers, health plans and professional trade associations that have an interest in improving HSAs in order to enhance participation nationwide.
Health reimbursement arrangements
An HRA is an employer-funded account that is designed to reimburse employees for their qualified medical expenses. Like an HSA, an HRA requires an employee to obtain an HDHP. However, unlike the HSA, the employer is solely responsible for funding an HRA and the HRA stays with the employer if an employee leaves.
Through an HRA, an employer sets aside a portion of funds to be used to reimburse employees for qualified medical expenses that are paid for out-of-pocket (deductibles, co-payments, doctors visits, prescription drugs, etc.). Like HSAs, in an HRA all of the up-front medical costs are paid for by the employee, thereby encouraging an individual to be thoughtful with their healthcare spending. Once those services have been paid for, the employee submits a request to be reimbursed through the HRA.
Flexible spending accounts
An FSA is an employee-funded savings tool that allows an individual to set aside pre-tax dollars to be used for medical expenses such as co-pays, deductibles and services not covered under the base healthcare insurance plan. The individual employee is required to determine what amount should be deducted (pre-tax) for the FSA. However, under current law, if the FSA funds are not used by the end of the year, the money is returned to the employer.
All of these tools are innovative ways that involve the consumer (small business owners and their employees) more intimately than ever in the decisionmaking process about healthcare spending. But as people continue to explore alternatives to traditional healthcare, many will continue to look for options that provide a balance between keeping costs down while still maintaining a high quality of care.
As lawmakers continue to study the newest developments in healthcare spending, many anticipate additional proposals to enhance utilization of these medical savings and spending tools. You can follow what lawmakers are doing and share your thoughts about how changes and improvements might impact the affordability and access of healthcare in today's marketplace.
Download a brochure with basic information on HSAs (66 KB, PDF)
