For owners and HR managers of smaller businesses, offering health insurance coverage to their employees is arguably a given. And, while it can be relatively costly, for those companies that are considered “small businesses” by the Affordable Care Act (ACA) there are financial and tax incentives that can make it affordable.
And affordability is a key factor for employees, as well.
For example, if you happen to have a fairly small business with a large number of older employees, premiums will tend to be higher. As one financial website has noted,
“Health insurance rates go up as a policyholder gets older; the largest increases typically occur after age 55. This reflects the higher health care costs expected for older Americans.
At the high end of the age range, premiums for consumers 64 and older are capped at three times the base rate. For instance, a 64-year-old pays $1,230 per month for a Silver plan, which is three times more expensive than the monthly rate of $410 for a 21-year-old.”
But even for those at the lower, “more affordable” end of the monthly premium spectrum, it can be challenging to manage the costs for some younger workers.
Which is why the option of a Health Savings Account (HAS) combined with a high-deductible health plan (HDHP) has become an increasingly popular, especially among healthy, under-30 employees.
A BRIEF OVERVIEW OF HEALTH SAVINGS ACCOUNTS
So, what is an HSA?
According to one source, an HSA is a special bank account for your employees’ eligible health care costs. Your employees can put money into their HSA through pre-tax payroll deduction, deposits, or transfers. As the amount grows over time, they can continue to save it or spend it on eligible expenses.
An HSA allows your workers to put money away and withdraw it tax free, to be used for qualified medical expenses such as deductibles, copayments, coinsurance, and more.
While the amount allowed for an HAS is substantial, the IRS does put a cap on the annual contribution. However, all unused contributions roll over from year to year. For 2023, the IRS has increased that limit to $3,850 for self-only coverage and $7,750 for family coverage.
And if participants are 55 and older, they can contribute an additional $1,000 as a “catch-up” contribution.
Employee eligibility for contributing to an HSA requires that your employees:
- Not be enrolled in a health plan that is not an HSA-eligible plan, such as a full purpose health care flexible spending account (FSA)
- Not be enrolled in Medicare
- Not claimed as a dependent on someone else’s tax return
In addition, while HSAs have more risk due to the high deductible costs of the associated HDHP, there is a potential added benefit. This is due to the fact that HSAs can also be seen as the only retirement account that is triple tax-free. This is because the money employees put in is tax-free, the money they take out is tax-free, and the investment gains are tax-free.
HEALTH SAVINGS ACCOUNTS AND SMALL BUSINESS EMPLOYERS
While an employee can set up an HSA on their own, this option for providing affordable healthcare coverage can also be offered by employers.
An article from the Society of Human Resource Managers (SHRM) explains how this works,
“An employee’s HSA may be funded by contributions from the employer, from the employee or both. Employers may choose to contribute a set amount or make “matching” contributions. The IRS sets annual limits on the amounts that may be contributed to the HSA. If an HSA is funded by contributions from both the employer and the employee, it will be important to ensure that the total contributions remain within the annual IRS limits.”
If you and your employees choose to have an HSA option, keep in mind that while your contributions to one of your employee’s HSA may be excluded from the employee’s income, all employer contributions, including those made by the employee through a cafeteria plan, must be reported in box 12 of the employee’s W-2.
The article also notes that generally, contributions made by an employer to the HSA of an eligible employee are excludable from an employee’s income and are not subject to federal income tax, Social Security or Medicare taxes. And, as a benefit of the employer, the employer contributions are deductible as a business expense to the company.
HSAs Have Some Disadvantages
According one investment site, there are a few drawbacks for employees opting for an HAS:
- They’ll owe income taxes plus a 20 percent penalty if they withdraw funds from their HSA for non-qualified expenses before they turn age 65. After 65, they’ll owe taxes but not the penalty.
- High-deductible health plans (HDHPs), which are a requirement for HSAs, aren’t always the best option for employees, especially for those who have significant healthcare expenses. This is why an HSA/HDHP option is usually best for younger and healthy workers.
YOUR LOCAL EXPERTS FOR SMALL GROUP HEALTH INSURANCE
JC Lewis Insurance is a long-time, family-owned firm of expert brokers and is based in Sonoma County. 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 are self-employed 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 HAS/HDHP, we’ve got your back.
When you’re shopping for medical insurance for you and your family, you are likely to have several questions and concerns. That’s great because 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.