Another Look at Health Savings Accounts

Health savings accounts (HSAs) aren’t new, but with rising health care costs they warrant a closer look. The reason: HSAs, combined with high-deductible health insurance, can provide coverage for you and your staff at dramatic savings over traditional health coverage. It has been estimated that the arrangement can lower costs by 40% and recent statistics from *AHIP.org show that the number of businesses using this health care option is growing. Is this plan right for your business?Overview of HSAsHealth savings accounts (HSAs) were first created by the Medicare Modernization Act of 2003. HSAs are special savings accounts used in conjunction with high-deductible health plans (HDHPs). These are low-cost insurance plans with minimum deductibles of $1,200 for single coverage and $2,400 for family coverage in 2012, which means that employees pay out-of-pocket for these costs before the insurance kicks in. HSAs details can be found in IRS Publication 969.How HSAs workOnce the insurance component is in place, a savings account is funded with tax-deductible contributions (annual limits are set by the IRS). Funds grow on a tax-deferred basis. Withdrawals can be made by the employee at any time, for any reason. Withdrawals to cover qualified medical expenses are tax free; withdrawals for other reasons are taxable and, if the person is under age 65, subject to a 20% penalty.If the contributions are not used within the year, they carry over and can be used in the future—even as retirement savings. If the employee leaves the company, the account goes along (i.e., it’s “portable”).ContributionsContributions to the HSA can be made by the employer, employee, or a combination of both--the party making the contribution gets the deduction. The IRS sets the limits on annual contributions.

• For 2011: $3,050 for self-only coverage and $6,150 for family coverage.
• For 2012: $3,100 for self-only coverage and $6,250 for family coverage.

The contribution limit is increased by $1,000 for anyone covered who is at least 55 years old by the end of the year. Thus, a couple who are each 60 years old and have family coverage can contribute up to $8,250 for 2012 ($6,250 + $1,000 + $1,000).No contributions can be made once an employee turns 65 and becomes enrolled in Medicare Part A or B.If the company makes contributions, they belong immediately to the employees. Company contributions must be comparable (i.e., nondiscriminatory). Contributions are considered comparable if they are the same dollar amount or the same percentage of an employee’s health plan deductible.There are no payroll taxes on employer contributions to HSAs.Acceleration of contributionsContributions can be made in increments throughout the year. Contributions can be made as late as the due date of the return, without regard to extensions (e.g., April 17, 2012, for 2011 contributions).You can accelerate all or part of contributions for the year on behalf of employees who have incurred medical expenses in excess of the accumulated contributions to date. This helps employees meet unexpected medical costs.To incorporate this acceleration provision within your company’s HSA, the option must be available on an equal and uniform basis to all eligible employees throughout the year. You must set up reasonable uniform methods and requirements for acceleration of contributions and the determination of medical expenses that would warrant acceleration.Plan administrationSome insurance companies offer one-stop HSAs; you buy the coverage and maintain the plans at the same insurer. Otherwise, you are free to purchase HDHP through an insurer and then set up the HSAs through a financial institution offering such accounts.Learn moreThere are many resources to help you find out more about HSAs and whether they’ll work for you and your business. Check out:

• *HSAs employer benefit calculator will give you a rough idea about the savings from using this plan compared with traditional health coverage.
• *HSA insights provides general information about HSAs.

Final thoughtIf you change from traditional coverage to an HSA, be sure to educate your staff about the reasons for the switch and how the HSA operates. The new arrangement may take some getting used to, but can work successfully in the long run.*denotes nongovernment Website

About the Author

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for 2011 and 2012. Follow her on Twitter: @BarbaraWeltman.