When it comes to group health plans, many small businesses choose HDHP (High Deductible Health Plans). In fact, according to Kaiser/HNET’s Employer Health Benefits Annual Survey, roughly 20 percent of all group sponsored health insurance plans in 2013 were HDHP plans. If you are considering an HDHP plan or already have one in place, then you may want to compliment it with a HSA (Health Savings Account) account as well.
Why is the HDHP Plan so Popular?
HDHP plans allow you to reduce the employee benefit costs because the premiums are lower and the deductible is higher. Basically, it means that the employee will be responsible for a greater part of an their total healthcare costs due to the higher deductible and out-of-pocket expenses. At first glance, this type of plan seems beneficial to employers but not at all to employees. It’s when the plan is complimented with an HSA account that it becomes a strong option for small businesses.
How Will an HSA Account Help?
The way an HSA account works is that it’s a type of savings account that belongs to the employee, not the employer. The employer, however, can make contributions to the HSA account on every payday. The money in this account can then be used towards paying the employee’s health insurance deductibles or other qualifying medical expenses that may not be covered, such as vision or dental care. The following are some of the advantages of an HSA account:
- The HSA account won’t be taxed – An HSA account is similar to an IRA account. This is because the amount of money that goes into the HSA account of an employee will not be subject to federal taxes, social security taxes, medicare taxes or any other type of payroll taxes. Basically, it’s a way to turn taxable income into tax-free income.
- The contributions are tax deductible – Any money that is contributed to the HSA account by the employer can be deducted on the tax return of the business for the year in which the contributions were made.
- The balance will not go away – Because the HSA account belongs to the employee, they will not be punished if they leave your company, whether it’s because they are moving to a different place, getting a new job or retiring. The unused balance of their HSA account the day they leave will go to the employee. This means that employees can build a substantial amount of savings that can be used towards medical expenses once they retire.
- There’s no minimum distribution – Unlike similar savings plans, like IRAs and 401(k)s, which require a minimum distribution once the employee reaches 70 and a half years of age, there is no minimum distribution requirement on HSA accounts. This allows the employee a lot of flexibility once they retire since they can access their HSA funds for qualified medical expenses whenever they actually need it without fear of triggering a federal income tax.
- Employees can withdraw at any time – Employees can withdraw funds even if they aren’t used for qualified medical expenses. They will have to pay a federal income tax on these funds in this case. However, if the federal income tax has dropped and is lower than it was when the contributions were made, then withdrawing the funds at this time would still lower their overall federal tax burden. It’s a loophole that employees could take advantage of.
If you’re looking at small business health insurance plans, you may want to consider an HDHP plan grouped together with an HSA account. For additional accounting and tax advice, contact Valezar & Associates today.