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Health Savings Account Basics
By Dan Weedin, CIC

If you are an employer who’s feeling challenged by the need to manage your health insurance costs, it might be time for you to take a close look at health savings accounts (HSAs).  The federal government created HSAs three years ago to offer individuals the opportunity to, in a sense, become their own insurance companies.

• The medical portion is underwritten by an insurance company and has a high deductible, usually beginning at $1,100 and going up from there.  The medical insurance works exactly the same way you are used to; the difference is that you pay a much larger portion of the expenses out of pocket and the deductible is higher.  Once the insurance company’s portion kicks in, you will find all the normal coinsurance percentages and maximum benefits you are accustomed to.
  
  
• An individual HSA user then opens a regular bank account for the sole purpose of paying medical costs.  Most banks now offer this program, so you will probably find this option available at your own bank.  Each year, an individual can deposit up to $2,850 ($5,650 for families) into this separate bank account using after-tax dollars, regardless of the deductible. 
  
  
• The individual can use the money in his or her dedicated bank account to pay for out-of-pocket medical expenses, such as deductibles, prescriptions, and lab work.  The cool part is that you can also use these funds to pay in full for medical expenses not normally covered by insurance, such as holistic medicine, wheelchairs, massage therapy, orthodontics, and bandages (to name a few).  The individual decides what and how much will be paid.  (For a complete list of eligible expenses, you will need to contact a broker who sells HSAs.)
  
  The overall goal, however, is not to pay out too much early on if you can avoid it, so that the account balance grows.  Over time, the account could become very large, giving the account holders resources that can be used for recurring or more serious expenses.
  

• The business owner can make contributions to the employees’ accounts if desired.  Because employees now face a higher deductible, the employer’s contribution could be a trade-off for the decreased cost of premiums.  In most cases, all employees must be treated equally.  There is a new law that gives employers some flexibility.  For instance, one idea is for the employer to budget a set dollar amount for each employee’s health insurance cost, then contribute the difference between the premium and the budgeted amount to each employee’s HSA.  Unlike the employees’ own contributions, the employer’s contribution is tax-deductible for the business owner and tax-free for the employee, who will use it to pay for medical expenses now or continue to save it in the HSA for future medical expenses. 
  
  However, regardless of whether the employer makes a contribution, the maximum that can be deposited into an individual’s HSA is the amount listed earlier for individuals and families.  For example, if the employer contributes $1,200 per year, the individual employee can contribute only $1,650.

The bottom line for employers is this: You can significantly lower what you pay for  monthly health insurance premiums, even if you make contributions to employee accounts.  For small firms where everyone is in the same boat, this can be very attractive, while firms of all sizes can gain more control over their budgets.  The difficult part is getting your employees to understand the concept of a higher deductible and how the bank accounts work. 
 
Please note that this is just a basic overview.  You will need to talk to a broker who specializes in health savings accounts to understand all the details and how they can be applied to your business.