As a small business owner, you may already offer health insurance coverage benefits to your workers. Or you may be relatively new to the employer role and have just recently decided to make group coverage an option for your employees.
Either way, understanding the purpose and role of a Health Savings Account, or HSA, in the mix of small business health insurance offerings is crucial.
WHAT IS AN HSA AND HOW IT AFFECTS YOUR HEALTH INSURANCE PLANS
In terms of a definition, understanding the basic concept of Health Savings Accounts is fairly simple and straightforward.
The website at Healthcare.gov defines it as,
“A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs.”
Health Insurance Marketplace® further explains that,
“You’re eligible to contribute to an HSA when you’re covered by certain high deductible health plans (HDHPs). With HDHPs, the monthly premium is usually lower, but you pay more health care costs yourself before your insurance company starts to pay its share. You can’t contribute to an HSA if you have Medicare coverage, or a plan that pays its share of a covered service without you having to pay deductibles or copayments first (called “First Dollar Coverage“).”
Essentially, an HSA cannot be had on its own but must be set up in conjunction with the purchase of a high deductible health plan, or HDHP.
HDHPs are health coverage plans that have a much higher deductible than traditional insurance plans. Although the monthly premium typically is lower an average traditional plan might require, a member will pay more health care costs themselves before the insurance company begins to pay its share. This amount is known as the member’s deductible.
A high deductible plan (HDHP) can be purchased by itself, or it can be combined with a Health Savings Account (HSA). Making use of an HSA allows a member to pay for certain medical expenses using the funds in the HSA and without paying federal taxes on that money.
In 2023, the IRS has defined a high-deductible health plan as a health plan with an annual deductible that is not less than $1,500 for self-only coverage or $3,000 for family coverage. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) for 2023 do not exceed $7,500 for self-only coverage or $15,000 for family coverage.
INCLUDING HEALTH SAVINGS ACCOUNTS IN YOUR SMALL GROUP COVERAGE OFFERINGS
The truth is that most employees will not opt for an HAS/HDHP offering as the potential out-of-pocket costs for most workers is quite high. As an article at Investopedia points out,
“The main downside of an HSA is that you must have a high-deductible health insurance plan to get one. A health insurance deductible is the amount of money you must pay out of pocket each year before your insurance plan benefits begin.”
This means that an individual could potentially have to spend upwards of $7,000 or more for the year of their own funds before any insurance coverage were to kick in. That amount could be as much as $15,000 if a family is covered with the HDHP.
On the other hand, the money an employee saves in an HSA is tax-free.
In fact, employees can claim a deduction on their tax return for HSA contributions regardless of whether or not they itemize deductions. Employees can claim a tax deduction even if someone other than their employer makes a contribution to their HSA. Those with HSAs do not even pay taxes on the earnings and interest they receive from the assets held in their HSA.
Also, the money in a Health Savings Account “rolls over” from year-to-year if it is not spent.
In addition, any withdrawals from an HSA that are used for medical expenses are not subject to taxation. The money you contribute to the account isn’t taxed as long as it’s used for qualified, out-of-pocket medical costs, like:
- Ambulance costs
- Doctor visits
- Hearing aids
- Prescription drugs
- Psychological therapy/psychiatric care
- Qualified long-term care services
- and similar expenses
In some instances, HSA participants can spend the money on similar medical costs for their spouse or dependents.
USING AN HDHP/HSA OPTION AS A FINANCIAL STRATEGY
While those employees who can anticipate routine doctor’s visits throughout the year, or have certain conditions that they know require costly procedures, tests, or prescriptions, will no doubt pass over an HDHP/HSA offering, younger employees may not.
Generally speaking, A high deductible health plan – combined with a Health Savings Account is a good fit for younger, healthier workers who do not expect to need healthcare coverage except in the instance of a serious health emergency.
For most employees, the main benefit of a high-deductible health plan combined with an HSA is the tax savings. In addition, there are the benefits of being able to cover some expenses that an insurance plan does not, being able to have others contribute to the account, and the convenience of using the health savings account to pay for healthcare expenses.
As Investopedia points out,
“The money is yours forever. You can allow it to grow in your HSA. Some people use their HSA as part of their retirement planning strategy.”
So, where does one find Health Savings Accounts?
Banks, insurance companies, and other financial institutions typically offer HSAs. As for the HDHPS, these HSA-eligible plans are generally available through the Health Insurance Marketplace®, the Small Business Health Options Program (SHOP), or “off exchange”, that is, outside of the Marketplace.
YOUR LOCAL RESOURCE FOR SMALL GROUP HEALTH INSURANCE PLANS
J.C. Lewis Insurance Services, a long-time, family-owned firm of expert brokers for over 50 years, is located in Santa Rosa. Serving the greater Sonoma County region, we offer California health insurance plans only from leading health insurance carriers that are licensed to do business in California.
And we are licensed and certified by each of these insurance carriers to offer coverage to small-group employers, along with Medicare supplemental and prescription drug plans for seniors.
If you’re a business owner looking to make changes in your small group coverage, or you’re an employer that does not currently offer employee health benefits, there are many options available for your workers as well as for you and your family. So, whether you’re deciding between an HMO plan, PPO plan, or even an HSA/HDHP, we’ve got you covered.
When you’re shopping for medical insurance for you, your family, and your employees, we know that you are likely to have several questions and concerns. And that’s a good thing. We welcome your questions about health coverage insurance, and you can be confident that JC Lewis Insurance Services will help you find the right solution.