Health Insurance for small businesses: HDHP, HSA and more

28 06 2007

Baby and mother

A month ago, Jenny Thomas checked into her local hospital to deliver her first child. Unanticipated complications necessitated an emergency surgery. Fortunately both she and the baby were fine. But if it hadn’t been for her family’s health savings account (HSA), she could have ended up owing the hospital tens of thousands of dollars. (full article)

I know that most of my readers come here to either see the latest that NowSourcing is up to, or the latest in tech news, but now it’s time to think about health insurance. I remember the w-2 days: a big piece of your check was your (after tax) insurance premium. The big decisions were made for you. When you own your own business (as I do), it’s a whole other ball of wax. Since a small business (and by the way, if you’re bringing in less than $10 million a year, yeah – you’re one of us) does not have the collective buying clout as a major world corporation, premiums “feel” generally higher. Notice that Alan Feigenbaum, CFP -as seen on– has something to say about that:

Such high-deductible (often $5,000 or $10,000) policies have much lower premiums, because the typical enrollees never have covered claims.

So, it’s on to reading up on the subject and deep diving into the healthcare bag of tricks. Let’s talk about a few of them here:

1 – Health Savings Accounts (HSA’s). This has been a fantastic advent of the IRS. Starting in 2004, HSA’s gave individuals a greater freedom than the ability to not just put in pre-tax dollars to help fund their healthcare expenses. Rather, they now were able to rollover money from year to year. HSA’s have also been increasing in the total amount that individuals can contribute – up to $2,850 individual and $5,650 family in 2007, an increase over IRS guidelines of $2,700 for individual plans and $5,450 for family plans in 2006.

2 – High Deductible Health Plans (HDHP’s). HDHP’s are actually a requirement for having an HSA (in most states). There are minimum and maximum deductible levels set in order to qualify for HSA’s.

In order to open an HSA account, an individual must first have an HDHP.

Part of the beauty of the HDHP / HSA system is that you have tremendous opportunity to make over the counter purchases, have a debit card directly in to your account, and even to earn interest by investing your HSA in mutual funds. Some have even called the HSA a “medical IRA”.

Investopedia fills in our knowledge gaps with alacrity:

What is a High-Deductible Health Plan – HDHP? A health insurance plan that has a high minimum deductible, which does not cover the initial costs or all of the costs of medical expenses. The deductible forces the insurance holder to pay the first portion of a medical expense before the insurance coverage kicks in. The minimum deductible for a plan to fall into the category of an HDHP varies each year. These high-deductible health plans are thought to lower overall healthcare costs by forcing individuals to be more conscious of medical expenses. The higher deductible also lowers insurance premiums, making health coverage more affordable.

Straight to the source: IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. This 19 page PDF introduces the taxpayer to various programs designed to give individuals tax advantages to offset health care costs including HSA’s. (See bullet points below.) IRS Publication 553, Highlights of 2006 Tax Changes. I searched this document and found information on our topic on page 8 (of 32). In short summary, COL changes have taken place for both the minimums and maximums relative to HSA’s.

  • No permission or authorization from the IRS is necessary to establish an HSA. When you set up an HSA, you will need to work with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs).
  • An HSA is “portable” so it stays with you if you change employers or leave the work force.
  • An HSA is generally exempt from tax. You are permitted to take a distribution from your HSA at any time; however, amounts that remain at the end of the year are generally carried over to the next year.
  • Earnings on amounts in an HSA are not included in your income while held in the HSA.



5 responses

10 07 2007

This info I really needed. Just got a PPO plan with a 5000 deductible, but it’s not listed under Blue Sheilds HSA plans. Didn’t know what it was until I saw the web site. Still not sure how it all works but I will be changing my plan after reading this.

10 07 2007

Glad to hear that this information was valuable to you. With as high a deductible that you have mentioned, you could really save a good deal of pre-tax dollars with an HSA. The beauty of the HSA is that it can now rollover to the next year (it used to be spend it or lose it) and that the “qualified expenses” cover a vast array of things: from prescription and office visit copays to (certain) over the counter health and medicinal items.

6 08 2007

I am just getting it my proprietorship to cover me and my wife.
I am assuming I will spend more than my deductible and it is still cheaper than my regular plan. It is a no brainer as long as you are disciplined to do the paperwork. Starting in the middle of the year you can invest full year in the HSA starting from this year.

22 01 2008

I was late a little, but all have found the necessary information at you.
Thanks you for this post.

21 02 2008
Scott Borden

Great job! I love to see proper representation of the common sense that HSAs represent. Most articles out there state the high deductible is like not having any insurance at all. I love to point out that our auto insurance doesn’t cover windshield wiper blades or oil changes. Our homeowners insurance won’t cover your furnace if it goes out. Why do we look at health insurance different? It’s as if some people believe health insurance companies are charitable organizations that have your best health and welfare in mind. I see them as simply a for-profit necessity that is attempting to get us to pay them as much money as possible. I am an insurance agent that doesn’t like insurance.

Once more Americans become involved in the financial aspects of our health care delivery system we can begin to treat the real illness plaguing our health care system, over-utilization. SInce most people pay a co-pay and the insurance pays the rest, there is insulation from actual costs. I constantly find people that were paying a higher co-pay for a drug than what full price would be with the HDHP / HSA plans. At least the cost of the insurance will typically count towards the deductible. Rarely do co-pays count towards any out-of-pocket maximum. For understanding out-of-pocket risk there is no simpler plan design than the typical HDHP.

We feel anyone that truly understands the triple tax-advantages of the HSA along with the true out-of-pocket maximum that HDHPs offer will want to own one.

Thanks for getting the word out!


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