Health Savings Accounts (HSA) may be an affordable health insurance alternative for small businesses to offer to their employees. Health Savings Accounts are not addressed to any real extent in the health care reform movement and HSA's were signed into law with Medicare legislation signed by President George W. Bush in 2003.
What are Health Savings Accounts
Health Savings Accounts are accounts owned by individuals to cover current and future medical expenses. They can be offered by employers to employees through the use of high-deductible health plans (HDHP) or insurance that does not cover the first dollar of medical care, unless it is preventive care. The HDHP can be a Health Maintenance Organization (HMO), a Preferred Provider Organization (PPO), or another approved organization.
Any employee that is covered by a HDHP or a high-deductible health plan is eligible as long as they are not covered by other insurance plans, enrolled in Medicare, or claimed as a dependent on someone else's tax return.
HSA Contribution Rules
The small business owner (employer), individual (employee), or both can contribute to the employee's HSA. If the contribution is made by the employer, it is not taxable to the employee. In other words, the contribution is not included in the employee's income or wages. The employee can make a one-time transfer from an Individual Retirement Accounts (IRA) to an HSA, subject to the contribution rules for the HSA for that tax year.
The employee can also contribute to their HSA through the salary reduction plan known as a cafeteria plan or a 125 plan. Contributions through a cafeteria plan are made by the employee "pre-tax" and are not subject to any employment tax. The employer can automatically make these contributions on the employee's behalf. Employees have to work more than 30 hours per week to be eligible for a HSA plan through their employer.
A self-employed individual, a partner in a partnership, or an owner in an S-Corporation cannot make an employer contribution for themselves. They can, however, contribute to their own HSA plan as an employee.
The contribution limits for 2009 are up to $3,000 for an individual and $5,950 for a family. HSA owners who are 55 years old or older can contribute an extra $1,000.
HSA Distribution Rules
HSA distributions are tax free if they are taken for qualified medical expenses including qualified over-the-counter drugs. Distributions may be taken by the individuals who owns the HSA and who is covered by the HDHP, the spouse, and any dependents. All receipts for medical expenses should be kept in order to prove that medical expenses are qualified expenses.
How are Health Savings Accounts set up?
Health Savings Accounts are held by a custodian or trustee. Examples of trustees are banks, credit unions, insurance companies, or other entities approved by the IRS. Trustee fees are paid from the account without any tax or penalty. The custodian must report all distributions annually to the holder of the account. Then, the individual must file Form 8889 with their tax return to report distributions to the IRS. Medical receipts will back up this form.
HSA accounts can grow through investment earnings just like IRA's. The money does not have to be used during a certain period of time like Flexible Spending Accounts. The money in them is fully vested.
Using HSA's with HDHP's may be a reasonably affordable health insurance solution for small businesses. Even though they aren't specifically addressed in the current version of the health care reform bill, they will probably fall in the co-op pools currently being discussed which may be the cheapest way for small businesses to provide adequate health insurance for their employees.
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