small business - Health Savings Accounts - What They Are and Why They Work
by Chris Malta
If you are in business for yourself, you have probably already discovered that individual health insurance is extremely cost-prohibitive. You may think paying outrageous fees is your only option. Or even that you can't afford health coverage at all.
What Are Health Savings Accounts?
A health savings account (HSA) is an insurance policy that was actually designed with the self-employed and the small business owner in mind. According to Mark Baker, HSA specialist for Golden Rule Insurance Company, "An HSA is a higher deductible health insurance plan that is coupled with a tax advantage savings account."
The difference between purchasing individual healthcare and investing in an HSA is similar to the difference between renting a home and buying one. If you rent, each month you write out a check to help your landlord pay off the home you're living in (and you don't even like him!). On the other hand, if you buy, you incur a higher cost up front with the deposit, but with every payment, you build equity.
Similarly, with individual healthcare, the premiums you pay for your policy are gone forever, whether or not you ever use your insurance. Whereas, with an HSA, you pay a higher deductible when you file a claim, but the money you invest in your health savings account remains yours, whether or not you use it. And when you do need it, it's there for you - it just builds up to be used for any future medical bills you encounter.
The Bad and Good:
- • You start with a high deductible. Not an attractive feature but it gets better.
• Your high deductible results in significantly lower premiums.
• The money you save, you can keep tax-free in your HSA. When you face any kind of medical expense, you can use that tax-free money towards your deductible.
Let's say you're in a car wreck and wind up getting saddled with tens of thousands of dollars in medical expenses.
Even though your deductible with an HSA is high, say three thousand dollars, the money you've saved (tax free) in your HSA will likely cover it.
When your deductible is met, your insurance takes over payments for its percentage of all your covered expenses. Every plan is different, but the most common scenario is that once your deductible is paid, you are covered for the remainder of the year. You can even use the pre-tax money in your account towards dental and vision expenses. Or out-of-pocket costs, like filling prescriptions.
And as long as you have a health savings account, that money remains tax-deferred in your account for any medical expenses you encounter. If you find at the end of the year that you have not spent what's there, don't worry - it rolls over. In fact, it can just sit there and earn interest until you do need it. According to Mr. Baker, his company is now paying a four percent interest rate on their clients' HSAs. If you spent that same money on the premiums of a plan with a lower deductible, that would just be money down the drain.
Your family deserves better coverage than your lucky rabbit's foot affords. If individual health care plans are out of your small business' budget range, health savings accounts may provide a very viable option, so you can have peace of mind in knowing that you're all covered... just in case.