Guide to Health Savings Accounts (HSA)

Panicked biz owners often cite the rising cost of health insurance as one of their top concerns. They know that workers value their medical coverage. But as owners they feel trapped, and must either pass along rate hikes or cut benefits entirely.

A relatively new health plan option (introduced in 2004) offers hope. Health Savings Accounts (HSAs) work in IRA-like fashion to cover out-of-pocket medical costs with tax-sheltered money. An HSA is an investment account funded by each individual, with optional contributions from your business. The accounts must be linked to an insurance plan that has a high deductible of, say, $1,000 to $2,500 or more. Money from the HSA pays health expenses until the insurance kicks in.

Here are the key features:

1. The annual contribution limit to an HSA matches the deductible on your health insurance. For individuals the limit is around $2,800; and around $5,600 for family coverage, with amounts adjusted annually to inflation.
2. The employer, individual or both can make contributions.
3. Plan providers will generally be insurance companies or banks. If your business sets up the plan you will arrange for employee HSAs.
4. To be eligible, an individual must be covered by a high-deductible health plan and must not be covered by other health insurance.
5. Each individual has control over the assets in their account.

Tips & Tactics
Helpful advice for making the most of this Guide

• Unspent funds carry over, so the accounts have the potential to rack up big balances over years of untaxed contributions and investment gains.
• Premiums on health plans with high deductibles are much more affordable.
• Employer contributions to a tax-favored HSA are exempt from payroll taxes, and the employee is not taxed either.
• HSAs compete with other tax-advantaged health care options. But word is now filtering out that for small business, nothing beats the generous tax benefits and broad eligibility features of HSAs.
• As medical costs soar, HSA popularity is taking off and they may soon become the dominant player.
• HSAs can't do anything about soaring medical costs, but they at least give small business owners and employees a tax-savvy tool to keep coverage in place.

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