Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations.
CHICAGO — If you’re like most businesspeople and professionals, you’re fighting what seems like a losing battle against the onrushing tide of rising healthcare costs—and the battle in Washington over healthcare reform is ratcheting up the tension higher than ever. In the meantime, there’s no end in sight. Double-digit increases in healthcare premiums have become the norm.
While this problem isn’t likely to disappear entirely, the changes in Health Savings Account (HSA) legislation signed into law more than 10 years ago offer you the possibility of making a dramatic reduction in the costs for keeping you, your family, and/or your employees healthy no matter how the skirmish in Washington turns out.
The 2003 law made HSAs permanent and available to professionals, business owners, and employees provided they are not covered by another health plan.
WHAT ARE HEALTH SAVINGS ACCOUNTS?
HSAs are federal programs designed to help individuals save for future qualified medical health expenses on a tax-free basis.
HOW DO THEY WORK?
HSAs come in two parts. First, you purchase a low-cost, high-deductible health insurance policy available through providers that include such giants as Aetna, UnitedHealth Group, Blue Cross, Golden Rule Insurance, and many others.
In conjunction with the insurance policy, you must open a dedicated savings account in which you make tax-deductible deposits to pay for your medical care. Each year, you may deposit up to the amount of the deductible on your insurance policy. The amount of the maximum deductible varies each year. For 2014, the maximum annual HSA contribution for an individual is $3,300; the maximum for family coverage is $6,550. People older than age 55 are eligible to contribute an additional $1,000 in their HSA under what is called the “catch-up” rule.
You then use the money in the account to pay for your medical care.
Once your total expenses reach the amount of your deductible—if it does—the insurance policy kicks in.
WHO IS ELIGIBLE TO APPLY?
In general, any person who is not covered by Medicare or another health plan and who is not listed as a dependent of another taxpayer may apply for an HSA.
NO REFERRALS ARE REQUIRED
The tax advantages of Health Savings Accounts along with control over choice of doctors makes them appealing to small-business owners and the self-employed as well as the uninsured. In addition to the tax incentives, HSAs offer complete control over choice of doctors and eliminate the unpopular referral requirements of some health plans.
“Nearly all of the policies I sell now are HSAs,” says Tom Rogala, Custom Benefit Solutions, Northville, Mich. “All of my plans provide 100% coverage after the deductible. I can’t imagine why any business owner or individual would want to go any other route.”
Rogala, an independent health insurance broker, says that many of his clients are small-business owners and professionals who need coverage for themselves and would like to make coverage available to their employees at little or no cost to themselves. HSAs make that possible.
“A business owner can sign up for an HSA for himself and make them available to any employee on a voluntary basis,” says Rogala. “That way, the employee deals directly with the provider. The employer is not involved and makes no contribution.”
EMPLOYERS MAY SET UP GROUP PLANS
A professional or business owner with employees can also sign up for a group plan in which the company pays a portion of the cost for each covered employee. The required employer contribution for group plans varies by state. In Michigan, for example, employers are required to contribute a minimum of 25% of the cost of the high-deductible insurance policy. “That’s still a lot less than it would cost the employer for any other type of plan,” says Rogala.
Rogala tells of one of his clients, a small-business owner who was paying $900 per month for coverage for himself and his family.
“With his HSA, his cost is $250 per month for the high-deductible insurance policy. Plus, he deposits $295 tax-deductible dollars in his Health Savings Account to pay for medical care as needed. If his costs for the year exceed the amount of his deposits, the insurance kicks in with 100% coverage. If his costs are less than his deposits for any year, the balance will roll over, accumulating a kitty to pay for future care.”
NOT EVERYONE AGREES
Of course, not everyone is enthusiastic about Health Savings Accounts. Skeptics argue that the high-deductible policies will deter some from buying an HSA plan, and others will be reluctant to dip into their HSA savings to pay for medical care with what amounts to their own money. At a congressional hearing in 2004, Rep. Pete Stark (D-CA) said he believed that high-deductible plans simply shift costs to so-called “consumers” who pay more out of pocket.
Rogala disagrees. “My files are full of examples of individuals who are thrilled with the savings and the service they’re getting through their HSAs.”
Despite the reluctance of some to jump on the HSA bandwagon, there is no denying the rapidly growing popularity of this approach to healthcare insurance. Employees like the way HSAs give them more choices and more control over their healthcare. Self-employed individuals and small-business owners say they like HSAs because they help to control spiraling healthcare costs, putting more money on their bottom lines.
The rules, exceptions and restrictions involving HSAs are relatively complicated, so you should not attempt to set up one without the help of a tax professional. For more detailed information about HSAs, visit www.irs.gov and search for “Publication 969.”
Have a question or comment? E-mail our editor Dave Davis at [email protected].