The new, tax-sheltered health savings account, part of the Medicare bill passed late last year by Congress, has big potential benefits for small business owners, their employees and their employees' families.
Many small businesses with less than 10 workers struggle the most with offering employer-sponsored benefits, said Arlyne Calabrese, an independent health insurance agent in Scottsdale. Many of these businesses can no longer afford the more traditional health insurance options, so they often don't offer benefits at all, she said.
Medical savings accounts were made available to small businesses, but were deemed a temporary solution, she said.
“Employees of smaller businesses may never have been given the medical savings account option, because either the agent or the boss didn't take the extra time to look into something different and/or educate their work force,” Calabrese said. “We've all been programmed to think that good insurance equals a low co-pay. Well, that's not always true. Health savings accounts will challenge this perception with their very appealing tax perks.”
Health savings accounts are available to people who have high-deductible health insurance policies. The deductible must be at least $1,000 for an individual and at least $2,000 for family coverage.
“A health savings account is actually a savings account that can be established by an individual whether or not they're employed, and it is set aside to pay for expenses that you have that are not covered (by your health insurance),” said Carleen Shilling, a certified public accountant at Eide Bailly LLP, a Valley-based firm that helps companies across the Valley establish health care account plans.
Health savings accounts provide more benefits to consumers than health flexible spending accounts, which are offered as part of employers' benefit packages, she said. Health savings accounts are now widely available through banks and insurance companies, she said.
“Unlike the flexible spending accounts, which if you don't use them during the year you lose the balance in that account, these balances carry over,” Shilling said. “If you set aside $2,000 and your unreimbursed medical expenses are $1,500, that $500 carries over into future years. Also, you can take an income tax deduction for that $2,000.”
Some of the other benefits include:
• You can use the pre-tax funds from your health savings account for a wide variety of health services, including prescriptions, over-the-counter medications, acupuncture, chiropractic adjustments and other treatments. Other expenses include long-term care insurance, nursing home costs, doctors, dentists and hospital bills, eyeglasses and contacts, lab expenses, physical therapy and counseling.
• You can contribute to the account at any time.
• The account is not tied to your employer. You have them throughout your career.
• You can qualify for an account even if you're unemployed, and the account can be used to cover COBRA payments and other health care needs.
• The higher your insurance deductible, the more you can sock away year after year, tax free.
“Employees can take advantage of the benefits that the job pays for and get private insurance for the rest of the family,” Calabrese said. “Savings on the conventional choices are measurable, but the savings a family would see with the health savings account is staggering. The idea here is to take the difference in the lower cost and use it to fund your health savings account.”
Even if you have medical expenses, you don't have to go to the health savings account to reimburse yourself for those expenses, Shilling said.
“If you have sufficient enough cash flow, you can leave that cash in your health savings account and earn money on it, and the interest is not taxable,” she said. “And then at age 50, if you decide you want to go out and buy a long-term care insurance policy, you can use that money to go out and buy the insurance for yourself, ” she said.
The health savings account allows people to pay for health expenses as you go, as opposed to pre-paying, Calabrese said.