Sunday, September 20, 2009

Small businesses controlling costs with HSAs

With health care premiums likely to increase by 10% next year (that's five times the inflation rate), small business owners are looking for cheaper alternatives. In Massachusetts, with its mandated coverage law, foregoing insurance is not an option and neither is purchasing an insurance policy with skimpy coverages. The state has established a minimum coverage standard, called "creditable coverage," that outlaws plans without prescription coverage, mental health care, pregnancy benefits, etc.

So where can one find a better deal? The answer may well be in a Bush-era insurance alternative that never really caught on. Until now.

It's a high deductible health insurance plan combined with a health savings account (HSA). The insurance component is somewhat of a throwback to the good ol' days when most people had deductibles that had to be met before insurance coverage kicked in, usually with the insured person still having to cover 20% of the covered charges.

A couple of high deductible plans are available through the Health Connector in Massachusetts, one from Tufts and one from Harvard Pilgrim, that satisfy the state's creditable coverage standard. The appeal of these plans is that they can be had for less than $1,000 a month for a married couple, hundreds less than low deductible HMO and PPO plans.

The yearly deductibles on these two plans are $2,000 and $1,750 per person, respectively, and both have maximum annual out-of-pocket costs of $5,000 per person. Though these exposures may sound alarming at first, the HSA component is a key part of the equation that makes this alternative work.

An HSA is similar to an individual retirement account (IRA) except that it is designed to pay for medical expenses, including co-pays, co-insurance and health insurance premiums if you're unemployed (COBRA payments, for example). Employers can make pre-tax contributions of up to $3,000 in 2009 ($5,950 for a family) to their employees' HSAs using a Section 125 plan. Owner/operators of S corporations, partnerships and most LLCs cannot participate in a Section 125 plan but can still take advantage of an HSA. Talk to your tax adviser before running afoul of these rules.

Unlike the medical savings accounts that HSAs supplanted, contributions to HSAs are not subject to a "use it or lose it" provision. The money accumulated in an HSA can be carried forward to future years, invested just like funds in an IRA account, and be withdrawn tax-free as long as the money is used to pay for qualified medical expenses.

The combination of a high deductible health insurance plan and a health savings account is generally less expensive than low deductible plans and gives employees an incentive to be smarter, more frugal users of health care services.

For more info: U.S. Treasury Information on HSAs

Copyright 2009 Randy Hunt

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