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Business Tip of the Month

Business Tip
of the Month
For the month of March 2004

 
Introduce your employees to the new health savings accounts

Have you heard of "health savings accounts" (HSAs)? If not, you probably soon will. Authorized by the recent Medicare Act, they're the latest product in business health insurance. HSAs are part of a trend to give employees and the self-employed greater control over their medical expenses, with some tax advantages thrown in. Here's an overview of how these accounts work.

An HSA arrangement has two components. First, there's a high-deductible medical insurance plan. This is similar to a regular plan, except that the deductible must be at least $1,000 for single participants or $2,000 for a family. The idea is that the policy covers major medical costs, while the participant pays for smaller items. Because the deductible is high, the monthly insurance premiums should be lower than for other plans.

Second, there is the HSA itself. Think of it as an IRA for medical expenses. The participant makes annual tax-deductible contributions to a special account. Just like an IRA, the funds are held by a trustee. Funds in the account can be used to pay for medical expenses at any time. There is no age requirement for withdrawals.

Individuals can contribute up to the amount of their insurance policy's deductible each year, subject to certain caps. The money can be invested, and the earnings are not subject to tax. Funds not spent in any year stay in the account, continuing to grow tax-free. If an individual changes jobs, the account moves with him or her. There's a penalty if HSA funds are used for nonmedical purposes, until the participant reaches age 65. Then the money can be used for any reason penalty-free but not income tax free. The definition of medical expenses is quite broad. It includes dental, vision, and even some nonprescription drug expenses.

An advantage of an HSA is that the participant can pay for unreimbursed medical expenses with pre-tax dollars. Because HSAs are so flexible, the individual also has much greater control over medical spending. Those who are relatively healthy can build up a reserve in the account, growing tax-free.

If you're an employer providing health coverage for your employees, the high-deductible plan will have lower monthly costs. You can use the savings to contribute to the employees' HSAs or to reduce benefit costs.

Contact our office if you have questions about the tax or other provisions of these new health savings accounts.

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