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The business community has been traditionally responsible for ensuring health insurance coverage for its employees. Generally speaking, individuals outside of the workforce and the self-employed have had to go without coverage, obtain public assistance or rely on their savings to pay for medical services and products. This employer-based approach to providing healthcare has worked out well during times of near-full employment, but the current period of extended unemployment and the recession has placed demands on the government for solutions.
Recent developments impacting the economy include a housing price correction followed by a financial crisis, slow economic growth, extended unemployment, increased under-employment and inflation. Families are now experiencing a higher cost of living coupled with either wage reductions or wage stagnation.
In the healthcare insurance arena, this has resulted in employers passing premium increases onto employees and single individuals (who are generally healthier) opting out of their employer-sponsored health coverage altogether, leaving more risk to be assumed by the remaining group. This economic environment has resulted in more reliance on the public sector to provide health insurance coverage and a shift away from the employer-based approach.
The small business community has an opportunity to take an active leadership role in shaping what healthcare will look like going forward. The available alternatives include (1) traditional group health insurance coverage, (2) health reimbursement accounts (HRAs) or flexible spending accounts (FSAs), (3) health savings accounts (HSAs), (4) post-retirement health insurance plans and (5) a hybrid approach, which gives employees an option of utilizing an HSA or allows them to continue using the employer-negotiated group plan.
There is not a one-solution-fits-all approach, so the approach taken will depend on a variety of factors including, most importantly, whether or not your business employs people.
A health savings account (HSA) is a trust created exclusively for the purpose of paying the qualified medical expenses of a beneficiary. An HSA can only be established for the benefit of an eligible individual who is covered under a high-deductible health plan (HDHP). IRS Code Section 223 and other related primary source tax materials govern these situations.
An HSA arrangement consists of high-deductible insurance coverage for individuals or families, and a savings account that can be used to pay for health-related services and products. Costs for medical services and products are paid out of a “savings account” funded by an individual, an employer, or both to the extent of the deductible. This means that a participant in an HSA will have to pay for all of his or her negotiated medical costs, excluding some preventive care treatment such as monograms, up to the established high deductible in addition to the HDHP premiums.
A health savings account is not employer administered and has post-retirement health insurance and flexible spending account features built into its structure. The account is funded either by the individual or a business using before-tax dollars. The account can be used to pay health premiums and other qualified medical expenses while acting as a possible post-retirement insurance account. It simply has an additional requirement for individuals to obtain a high-deductible health plan (HDHP). Admittedly, the HSA does not make sense for individuals nearing retirement age or in poor health.
Speaking in terms of businesses with employees that need health insurance, the hybrid approach would allow some participants to remain on the employer-sponsored plan and others to open HSAs with a much less expensive HDHP. Individuals of sole proprietorships (self-employed) and the partners of business partnerships with no employees would be naturally excluded from the hybrid approach for obvious reasons. They would simply make a personal decision to either obtain traditional health insurance for themselves and/or their families or obtain an HSA with a related HDHP.
The HSA healthcare option is also a tax-favorable way to set aside funds for current and future medical expenses and may even be available once retirement age is achieved. The following are a few tax-related benefits of an HSA: (1) contributions are deductible from income when made, (2) earnings from investments are not taxed, (3) distributions—except for health insurance premiums—for qualified medical expenses are not taxed, and (4) funds accumulated could supplement income during the time of retirement. Individuals should consult a tax advisor to discuss their specific circumstances.
Small businesses having to operate in an environment of uncertainty fortunately have an alternative when it comes to providing healthcare coverage. Selecting to use the HSA alternative or an HSA hybrid, dependent upon whether a business has employees with a need for health insurance coverage, should be just as straight forward as choosing to purchase traditional health insurance. The decision to utilize an HSA has the potential to save money on insurance premiums, divert risk and lower taxes before and subsequent to retirement age.