By William J. Lynott
As a business owner, you’re fighting what seems like a losing battle against rising health care costs. While this problem isn’t likely to disappear, the Health Savings Account (HSA) legislation, signed into law in 2003, offers you the possibility of making a dramatic reduction in your costs.
The law made HSAs permanent and available to everyone. Here’s how they work:
HSAs come in two parts. First you purchase a low-cost, high-deductible health insurance policy, available through a growing number of providers, including giants like Aetna, UnitedHealth Group and Blue Cross.
In conjunction with the insurance policy, you 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. You then use the money in the account to pay for your medical care. If or when your expense reaches the amount of your deductible, the insurance policy kicks in.
Consider this example: Shop owner Mark enrolls himself and his family in a plan with a $5,250 deductible policy. He then deposits 400 tax-deductible dollars per month in his HSA savings account. That year, his family’s out-of-pocket medical expense, paid from funds in his HSA account, comes to $3,200. Since his total deposits for the year were $4,800, the balance of $1,600 rolls over in the account. It compounds tax-free (as long as it is used to pay for qualified medical expenses).
As the money in the account grows, it becomes a resource available to cover the cost of routine or future medical care.
In another example, Tom enrolls in a similar plan with the same deductible. He also deposits $400 per month in his HSA account. However, one of Tom’s children had surgery that raised the family’s total medical expense for the year to $15,500. Once Tom’s out-of-pocket reached the family deductible of $5,250, the insurance paid the balance of $10,250. The HSA protected the family against a catastrophic medical expense.
In addition to the tax incentives, HSAs offer complete control over choice of doctors and eliminate the referral requirements of some health plans. The tax advantages, along with control over choice of doctors, makes HSAs appealing to small business owners and the self-employed, as well as the uninsured.
“A business owner can sign up for an HSA for himself and make it available to any employee on a voluntary basis,” says Tom Rogala, an independent health insurance broker with Custom Benefit Solutions, Northville, Mich. “That way, the employee deals directly with the provider. The employer is not involved and makes no contribution.”
The employer can 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, employers are required to contribute a minimum of 25 percent of the cost of the high deductible insurance policy, which is less than it would cost the employer for any other type of plan.
Skeptics of HSAs 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 their money.
At a congressional hearing in 2004, Democratic Rep. Pete Stark of Calif. said that he believed that high deductible plans simply shift costs to so-called consumers who pay more out of pocket.
One disadvantage for some prospective enrollees is the reluctance or refusal of some insurance providers to issue policies to people with serious pre-existing medical conditions. Still, there is no denying the rapidly growing popularity of this new approach to health care insurance. Employees like the way HSAs give them more choices and more control over their health care. Small-business owners say they like HSAs because they help to control spiraling health care costs, putting more money on their bottom lines.
As a business owner, you may well benefit from a comparison between an HSA and your present health insurance for you and your employees.