Health Costs Up? Not Necessarily

Health Savings Accounts (HSAs) may be an alternative way to obtain health coverage for you and your staff without experiencing the double-digit premium increases for traditional health coverage. As of January 1, 2010, there were about 10 million people covered by HSAs, which was an increase of 25% from the previous year; 2011 statistics are expected next month.

With no end in sight on the premiums hikes for traditional coverage, more small business owners and self-employed individuals are using or considering the use of HSAs--and for good reason.

Advantages of HSAs

Health savings accounts, combined with high-deductible health plans (HDHPs), can save businesses as much as 40% compared with traditional coverage (savings depend on whether the employer or employee pays the HDHP premiums and/or makes the HSA contributions). HDHPs are low-cost insurance plans designed primarily for catastrophic coverage; the shortfall in costs is supposed to be supplemented by HSAs.

HSAs are IRA-like accounts that produce a triple tax benefit:

  • Contributions are tax deductible.
  • Earnings on contributions are tax deferred.
  • Withdrawals to pay eligible medical costs (e.g., doctors’ bills, prescription drugs, and doctor-prescribed over-the-counter medications) are tax free.

There’s yet another tax-savings incentive. There is no FICA tax paid on HSA contributions made by employees when made on a pre-tax basis. In order to do this, the employer needs to set up a salary reduction plan (“cafeteria plan”) to make pre-tax contributions possible.

Use an online calculator to figure your savings from an HDHP/HSA arrangement versus traditional coverage.

Tax rules for 2011

To be eligible to make contributions to HSAs in 2011, there must be an HDHP in effect that has minimum deductibles and maximum out-of-pocket limitations for costs such as policy deductibles, co-payments, and other amounts.

  • Self-only (individual coverage) plans: minimum deductible of $1,200 and out-of-pocket limit of $5,950.
  • Family plans: minimum deductible of $2,400 and out-of-pocket limit of $11,900

The maximum HSA contribution for 2011 is:

  • $3,050 for self-only coverage
  • $6,150 for family coverage

Anyone age 55 or older by the end of the year can add another $1,000.

Tax rules for 2012

It’s not too early to start planning for your health coverage in 2012. This gives you time to shop around and assess your options. To help you comparison shop, the IRS has announced the HSA limits for next year.

The HDHP parameters for 2012:

  • Self-only (individual coverage) plans: minimum deductible of $1,200 and out-of-pocket limit of $6,050.
  • Family plans: minimum deductible of $2,400 and out-of-pocket limit of $12,100.

The maximum HSA contribution for 2012 is:

  • $3,100 for self-only coverage
  • $6,250 for family coverage

Again, anyone age 55 or older by the end of the year can add another $1,000.

For more about Health Savings Accounts, see chapter 19 in my book, J.K. Lasser’s Small Business Taxes 2011, and IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

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