Employee Benefits and Retirement Planning

Helping 'Em Save

SBOCTeam — Mon, 30 Jun 2008 20:12:00 GMT

How new rules help biz owners control employees 401(k)s

By Chris Freeburn

Helping your employees save for retirement is not merely an altruistic gesture on your part. There are huge benefits for you as an employer, and for your business as a whole. In today's increasingly competitive marketplace, businesses small and large are competing for highly skilled employees-and the competition is only getting more intense. Today's highly talented job applicants are looking for more than a good salary. They are seeking the kind of perks that provide financial security for themselves and their families in the long run.

Employers have a variety of options to choose from when deciding what sort of retirement plan to offer. By far, the most popular type of plan-both among employers and employees-is the 401(k). According to the Internal Revenue Service, more than 44 million American workers currently participate in 401(k) plans with a total investment of over $2.5 trillion.

A 401(k) is a "defined contribution" plan, as elaborated by the Internal Revenue Code, meaning that an employee elects to have a specified portion of his or her pre-tax wages directly contributed to the plan. Employee contributions are usually invested in mutual funds. Some employers offer matching contributions to part of or all of an employee's 401(k) plan contributions. Offering a 401(k) retirement plan will attract a better pool of job applicants to your company and help keep them there for the long term. Recent changes in federal tax law has made setting up 401(k) retirement plans much easier for small businesses, and increased the amount of money employees can save.

A variety of options

There are three basic types of 401(k) plan that businesses can offer to their employees:

Traditional 401(k): The most flexible type of 401(k) plan allows businesses to decide whether to make contributions to the plan for all participating employees, match employee contributions, or do both. Contributions can be made through payroll deductions. Traditional 401(k)s offer employers an advantage. Employer contributions to an employee's account are not fully "vested" at the time they are made, however. That means that an employer can create a specified time frame called a vesting schedule-usually several months-before any matching contributions to the employee's account become non-forfeitable by the employee. This means that if an employee leaves the firm, any matching contributions to his account made during the vesting period before his departure can be reclaimed by the employer. The IRS also demands that traditional IRA's conform to complicated "discrimination" tests, which compare compensation rates among plan participants. For additional and complete information on 401(k) plans, please visit irs.gov.

Safe Harbor 401(k): Under this type of 401(k) plan employers can contribute either matching or non-elective amounts to the plan for eligible participants. These employer contributions remain tax deductible and employee contributions are tax deductible as well. Unlike a traditional 401(k), all employer contributions are fully vested when made. The primary benefit of "Safe Harbor 401(k) plans" is that they are not subject to the discrimination testing that applies to traditional 401(k) plans. Safe Harbor plans are usually chosen by small businesses with several highly compensated owners/employees whose contributions to the 401(k) plan would be significantly disproportionate to other, lower paid employees.

Simple 401(k) Plans: These plans allow small businesses to adopt the basic features of a traditional 401(k) plan without the non-discrimination testing. Simple 401(k) plans are available to companies with 100 or fewer employees who receive a minimum of $5,000 in annual compensation. Participants in a Simple 401(k) plan may not receive benefits from any other retirement plan offered by the employer. While Simple 401(k) plans avoid the costly testing required by traditional 401(k) plans, they are permitted significantly lower salary deferment limits-$5,000 less per year than traditional 401(k)s. All employer contributions are fully vested when made.

Setting up a 401(k) plan has become a relatively easy affair for qualifying small businesses. Many major financial institutions have created programs that walk a small business through the plan setup and administration process. Setup fees for these programs are often under $5,000.

Increased employer control

In 2007, the federal government approved new rules that gave employers increased control over their 401(k) plans. Under the new rules, it is easier for employers to automatically enroll employees into the 401(k) plan. Employees still have the right to "opt out" of the plans, but most don't. Employers may now also exercise greater control over the mix of investments in which automatically enrolled 401(k) participants have their money invested. Before the rules change, automatically enrolled participants' funds were only to be invested in vehicles like money markets, which were guaranteed not to lose money. Under the new rules, if automatically enrolled employees do not select investment vehicles for their funds on their own, the employer and plan administrator can choose to invest their money in a mix of stocks, mutual funds or fixed income investments as they see fit.

Chuck's Story

SBOCTeam — Thu, 13 Dec 2007 21:26:00 GMT

By Gene Marks

Chuck put $1,500 in his pocket this year just for doing a little paperwork, and boy was he happy. "Honey," he crowed to his wife on the phone. "Tonight it's Seafood Shanty baby...and you can even order the shrimp cocktail!" Man oh man, we're talking payday.

How did he fall into this extra money? By doing something every business owner should do. At the beginning of the year he set up a Health Savings Account.

Wait a second; haven't these things been around for a while? Well, yeah. They're nothing new. But then again, Chuck doesn't like to do new things too often. He still drives a '98 Accord. He's still getting over the purchase of the fax machine. He's more of a wait and see kind of guy. Well, he waited, and then he saw. He saw how much money some of his friends were saving with these plans. "Enough is enough," he finally said. "I'm getting in on this game." So he took a little action. And he's reaping the rewards.

His insurance guy couldn't have been happier either. He's been beating on Chuck for years to set up HSAs for all of his employees. Luckily, he's a patient man. When Chuck said he was ready to move forward, the guy had his paperwork done in ten minutes flat. It's pretty simple stuff nowadays.

So how does this HSA thing work? Believe me, if Chuck can figure it out, then any business owner can do it. And business owners, like yours truly, are sometimes not the brightest bulbs in the bunch when it comes to this stuff.

First you have to make sure your health insurance plan is an approved plan for HSAs. Then you've got to change the plan to allow for higher deductibles. This lowers your premiums. Not bad. Your insurance guy will take care of all of this for you.

Now, here's the big savings part: Every week Chuck put away money from his paycheck before taxes. The money goes directly into his HSA. Chuck put away over $5,000 this year. The money just stays there in an investment account and can be invested anywhere he wants. So it earns interest and capital gains too.

Now, if Chuck needs the money to pay any health expenses then he takes it out of the account first. If he doesn't need it, then he just keeps it there, earning interest. Basically he uses the money to pay the deductible on his health insurance. If any big medical issue comes along, the insurance would kick in after the deductible.

This past year was a good year for Chuck. His company earned money. His daughter broke up with that squiggly little greaseball. The Yankees were eliminated again. Chuck was happy. But more so, his family had no medical expenses. So the entire 5K stood there in the account. And his salary was reduced by 5K so he paid about $1,500 less in taxes. Sweet!

OK, it wasn't all so easy. Changing the health plan and explaining the whole HSA thing to his employees was painful. Doing the paperwork and all the administration is kind of a pain. Some of his employees didn't make out so well, because they had medical expenses. One employee of his decided not to spend some of his savings on medical costs because he didn't want to dip into his account.

But putting aside those drawbacks, Chuck couldn't be happier with his HSA plan. He's saving a bunch of money on taxes. His health insurance premiums are lower. And as long as everyone stays healthy he can build up a nice little nest egg that can one day be withdrawn tax free. Just don't tell the squiggly little boyfriend. Once he finds out there's money in the bank he may want to come back.

*Gene Marks *is the President of The Marks Group PC (www.marksgroup.net), a Philadelphia-based reseller of financial, customer relationship and service management technologies like Quickbooks, GoldMine, Microsoft CRM and other popular software. Gene is also the author of the best selling Streetwise Small Business Book of Lists (www.smallbizlists.net).

Health Insurance: Examining the Options, Controlling the Costs

SBOCTeam — Wed, 31 Oct 2007 20:25:00 GMT

If you don't offer health insurance, should you? If you do, but the costs are killing you, what can you do? How do you find a health plan that won't make your company sick?
By Chris Freeburn

Perhaps the most burdensome issue facing small business owners today is health insurance. As costs continue to spiral and coverage options become more and more complex, many small business owners find the challenge of providing employees health insurance while keeping the company's bottom line healthy too daunting a task.

A 2005 Kaiser Family Foundation study revealed that just 60 percent of US business offered employees health insurance, down from 69 percent in 2000. The study noted that the decline came almost entirely from small businesses. Indeed, a July 2006 survey by payroll provider SurePayroll, found that 11 percent of small businesses currently offering employee health insurance were seriously considering dropping that coverage in 2007. "Small businesses don't want to be in the business of working their tails off simply to meet health care costs," says Michael Alter, president of SurePayroll.

Keeping this in mind, here are some important questions to ask as you evaluate your company's employee health insurance coverage.

Should I offer health insurance to my employees at all?
For many small businesses, whether to cover employees at all is the most pressing question. And a very difficult one. Cost is usually the primary issue in the decision. There's no getting around the fact that health insurance is expensive and is getting more expensive each year. According to the aforementioned Kaiser study, health insurance premiums rose an average of 9.2 percent in 2005, almost three times the increase in workers' wages, and more than twice the rate of inflation. Nevertheless, there are very good reasons for providing health insurance to your employees, despite the cost.

The first and most important benefit is that health insurance will attract better employees. Health insurance costs are not only an issue for business owners; the premiums for individual and family health plans are rising quickly as well. Consequently, few workers want to finance their own health plans. Since most large companies provide health insurance, skilled workers will tend to gravitate away from small businesses that don't offer some form of health insurance. So while you may save money in the short term by forgoing health insurance for your employees, you are also limiting the pool of talent from which you can hire, which can potentially limit your business's chances for growth in the future. "Competent, skilled workers are crucial to any business," says management consultant C. Davis Fogg. "Health insurance is so expensive outside an employer-provided plan, that few really talented workers were willing to work at companies that don't offer it."

Health insurance also serves as an incentive for your current employees to value their jobs, since they may not get health insurance from your competitors. This can boost both employee retention-employees are less likely to leave your firm if they receive benefits they may not get elsewhere-and employee productivity. Employees who value the health insurance coverage will be more motivated to work diligently for the firm, thus showing their worth as employees. Also, health insurance will allow employees to deal with any medical issues they face, leading to healthier, more productive workers.

How does offering health insurance benefit my business beyond attracting good employees?
Actually, company health insurance isn't only about your employees. If your business doesn't have a group insurance plan, it's likely that you're paying for your own family's coverage. Individual and family health insurance is usually significantly less expensive when purchased as part of a group plan compared to similar coverage purchased on an individual basis.

Also worthy of consideration are the tax benefits offered by a company-sponsored group health plan. Insurance premiums are usually 100 percent deductible against business taxes, and if the health insurance is offered as part of a compensation package, it can be used to lower payroll taxes. This also benefits your employees who can pay for their part of the monthly insurance premium with pre-tax dollars.

Have I looked at lower cost alternatives to group health plans?
The dramatic escalation of health insurance costs has caused much pontification as well as some real action in Washington. In 2003, Congress created Health Savings Accounts (HSAs)-which went into effect in 2004-as an alternative to traditional medical insurance. HSAs are offered only in conjunction with a High Deductible Health Plan (HDHP). Sometimes called "catastrophic health plans," HDHPs generally cost a great deal less than traditional health insurance plans, but feature minimum deductibles for 2008 of $1,100 for individuals and $2,200 for families, with maximum out-of-pocket expenses of $5,600 for individuals and $11,200 for families. Though HSAs and HDHPs can be set up by individual consumers, they can also be offered through employers. If you offer an HDHP plan, all full-time employees must be treated equally under the plan. Deposits into employee HSA accounts are made on a pre-tax basis, with the maximum deposit being $2,900 for individuals and $5,800 for families. Funds deposited into HSAs are the property of the employee making the contributions and any unused funds are carried over from year to year and continue to earn tax-free interest on behalf of the employee. Funds in an HSA can be withdrawn without advance approval to cover any qualified medical expense, including deductibles for HDHP coverage and expenses not covered under the insurance plan, such as dental, vision, chiropractic services, and over-the-counter medications. Some HSAs offer a debit card to pay for such expenses, others offer checks or reimbursements; most offer a variety of ways to access the funds in the HSA. HSAs are fully portable, meaning the funds remain the property of the employee even if he or she leaves the firm or changes health plans.

Similar to HSAs are Health Reimbursement Arrangements (HRAs), which can be used in conjunction with HDHPs or other traditional insurance plans. An HRA is an employer-funded account that reimburses employees for medical expenses as they are incurred. The advantage to the employer is that such funds are expended only if they are needed, meaning that the healthy employee, who requires little or no care beyond an annual physical, will save the company money, making the HRAs of employees in genuine need that much more affordable. Unused funds remain the property of the employer.

What advantages do HSAs and HRAs offer small business owners who want to provide health insurance to their employees?
HSAs and HRAs, when coupled with HDHPs, offer a significant cost savings to employers via substantially reduced permiums. Small business owners who have traditional group health plans could save anywhere from 20 to 60 percent of their current annual health insurance costs. They also motivate employees to be more selective in their use of health care in the interest of keeping their out-of-pocket expenses within the funds available through the HRA or HSA. (This feature is the reason these plans as a group are often referred to as Consumer-Driven Health Plans.) The significant savings possible with HSAs and HRAs make them particularly attractive to small businesses who have never offered their employees health insurance before as well as to those facing bottom-line breaking premium increases.
What are the disadvantages of HSAs and HRAs?

The primary drawbacks are the high deductibles imposed by the HDHPs needed to create them, which may leave HSA and HRA holders facing the possibility of fairly significant expenses if they have serious medical bills, albeit less than they would incur with an HDHP without an HSA or HRA. An aditional disadvantage of the HRA is that all unexpended funds in a given year remain the property of the employer and do not carry over to the following year. For an employer, the lower premium costs of HDHPs must be balanced against the increased costs that may be borne by employees, who may value such coverage less than a traditional insurance plan.

Is there any way I can offer my employees insurance outside of an insurance plan?
Section 105 of the IRS tax code permits employers to reimburse employees for medical expenses. Each year, you can decide how much your business is willing to reimburse your employees, and then the employees use that money to purchase individual health insurance policies on their own. The money contributed to these plans by the employer is tax-free for the employee and is tax deductible for the employer. This offers small companies the chance to give their workers some form of health benefit without the complications of paperwork and hefty insurance premiums. Employers can also choose to contribute to employees' HSAs as mean to assist them with their medical costs, thereby providing their employees with available funds that will remain with them from year to year.

Does my insurance provider offer programs geared to help lower costs for traditional group health plans?
Many major insurance providers have designed group health plans specifically to meet the needs and financial concerns of small businesses. Talk to your agent or broker about the options or go to any of the web sites mentioned in our resource box at right.

What steps can I take to reduce overall costs on my existing group health plan?
There are several methods of reducing costs on existing health plans. But not all will be popular with your employees. Reducing benefits (eliminating dental or vision care coverage, for example) and increasing the co-payments employees must pay when visiting physicians will lower costs, as will increasing the co-payments for prescription drugs. Most importantly, small businesses should shop around for the lowest cost plan. "There are many health insurance providers out there," advises Todd McCracken, president of the National Small Business Association (NSBA). "Small business owners should consider a range of offers from as many companies as possible." Working with an insurance broker can bring you a much greater range of possible providers than trying to solicit offers on your own.

Can I lower the percentage of the premiums I pay per employee? Is there a minimum I have to pay?
It depends on the state in which your business is located. Many states have no legal minimum for employer premium contribution. Others, like California, demand some employer contribution, but none more than 50 percent of the premium for each employee. Typically, small businesses will cover about 30 percent of an employee's individual premium, while leaving the employee to cover the entire premium for his or her family. But there is no firm rule. While this places considerable discretion in the hands of employers, a higher employer contribution to insurance premiums can mean happier employees. Generally, it's a matter of how much the business can afford to cover.

Do I know what plan fits my employees best?
Before you select a plan, you may want to discuss the matter with your existing employees to determine what medical services they would want to be covered and how much they would be willing to contribute toward that coverage. Such a discussion would also be a good time to acquaint them with the cost of health insurance to the business. But you should also keep in mind that the insurance you ultimately choose may also help attract high-quality future employees, a consideration that will also influence how much you are willing to spend on health insurance.

When considering insurance providers for your small business's insurance plan, you may receive a number of proposals and quotes from your insurance broker, or from different insurance companies directly. When evaluating the offers, here are some important questions to ask.

1. Is the insurance provider financially sound and does it have a good reputation? The larger, well known insurance companies are typically multi-billion dollar corporations, but many smaller, less sound, providers exist, often offering discount insurance. If you are uncertain of the company's stability, it's best to look elsewhere.
2. How is the plan administered? How much paperwork will be required for your business? Does the insurance provider offer an easy way to contact its representatives if you have a question or problem?
3. How often will the policy be renewed? Some policies are renewable annually, others every six months.
4. How quickly will claims be paid? This can be a critical issue since slow claims payment can result in major hassles for you and your employees, including collection actions by physicians demanding payment.
5. What's in the small print? Be careful of penalties and any "hidden deductible" that may be written into the policy, but not highlighted by the insurance provider. Make certain that these have been fully explained before signing a contract with the provider.

Chris Freeburn is an associate writer for Business 24/7 magazine

Examining The Options: Finding Health Insurance That Won't Make Your Company Sick

CommunityTeam — Wed, 03 Oct 2007 14:35:00 GMT

The task of choosing a health insurance policy for you and your employees can be daunting. Small business policies come with widely varying prices and a range of options for coverage that sometimes seem almost impossible to decipher.
By Reed Richardson

Worse, even the cheapest policies can seem absurdly expensive. But many of you no doubt feel that a robust health insurance plan is necessary to attract and retain a talented group of employees. Many of you also probably feel that it's just the right thing to do. You care for the people who work for you and want to be sure they're protected in the event of accident or illness.

Fortunately, with a little work, you should be able to find a plan that protects the health of your workers while not endangering the health of your business. Given the fact that you can take a tax deduction for premiums paid to qualifying group health plans, the right health insurance plan may even seem like a bargain.Well, almost.

Regulatory issues
Government regulations differ from state to state. That said, your company should be eligible for small group coverage if it has at least two full-time owners or workers and it's a legitimate business entity (with a business license or articles of organization).

The percentage of your employees participating in your company health plan also must meet the minimum set by your chosen insurance provider. Some regulations dictate how much of an employee's premium the employer must pay, usually around 25 to 50 percent. You might also choose to extend coverage to employee spouses or dependents, but that's usually not required. Once you check your state's regulations-try the state insurance commissioner's office-give some thought to a few questions that will affect your final choice. Among the crucial issues: Who will be eligible for coverage? Should you include part-time employees? Will there be a waiting period for new hires before they qualify for coverage?

Also consider which of these factors matter most to you and to your business: Monthly premiums. A start-up or a business with modest profits might decide to simply find the cheapest reliable coverage around. A firm that needs to deliver a more robust benefits package to attract and retain employees will consider springing for something more expensive. Either way, you'll want to keep a sharp eye on what you get for your extra dollars-and you should give careful thought to whether those extra benefits are worth the money to your business.

Out-of-pocket costs. This is the amount you and your workers will end up paying for deductibles and co-payments for a range of services, from drugs to doctor's visits to hospital stays. A company with a younger staff might save money by choosing a policy with higher out-of-pocket costs, since workers might not need as much medical care. Older workers or employees with health problems might be hard-pressed to meet out-of-pocket costs on some cheaper policies.

Provider options. Here again, the age of your employees might make the difference. A plan that allows patients broad discretion to choose (or keep) their physicians might appeal to older employees. Younger workers might be more flexible.

Indemnity vs. managed care
Health insurance policies fall into two basic categories: indemnity and managed care. Under indemnity plans, also known as fee-for-service plans, the insurance provider will reimburse for all or part (usually just part) of a visit to a doctor or hospital of the patient's choice. This coverage offers unlimited discretion to the patient, but it is much more expensive
than managed care coverage.

That's why managed care options are more popular. They come in three forms:
HMOs. Health Maintenance Organizations tend to be the least expensive plans around-but there's a catch. Enrollees are limited to the HMO's sometimes limited network of providers, and must rely on a primary care physician to refer them to specialists.

PPOs. Preferred Provider Organizations are the most flexible plans. They contract with a network of doctors and hospitals that work at discounted rates. However, patients who are willing to pay a bit more can go outside of that network. Moreover, patients don't need a primary care physician to refer them to specialists. PPOs tend to be significantly more expensive than HMOs.

POS plans. Point-of-Service plans combine elements of HMOs and PPOs. As with an HMO-and unlike a PPO-enrollees must select a primary care physician who can refer them to a specialist within the plan network. But you also have the freedom to go outside of the network, just as with a PPO.

The devil in the details
Once you've decided upon the type of plan that's right for your business, you'll have to sort through various policies within each category. You may find options that will save you money without compromising on your primary goals. For example, Blue Cross/Blue Shield of Massachusetts offers a policy called HMO Blue Preferences with small deductibles for certain services and slightly higher co-payments. "Maybe you go from a $10 co-payment to a $30 co-payment for an office visit," says BC/BS spokesman Chris Murphy. "That lowers the employer's premiums, but employees still get the quality that Blue Cross/Blue Shield offers."

In most plans, the equation is pretty simple: the higher the deductible, the lower the monthly premium. In other words: You pay more, your employees pay less. If your employees pay more, then you pay less. You need to decide how much of their health care you can reasonably ask your employees to shoulder. Again, this is a tough decision that is likely to involve an array of considerations and each owner is likely to reach a different conclusion depend-ing on the owner's industry, the particular mix of employees involved, and the owner's individual sense of responsibility for his or her people.

Some policies offer riders for supplemental coverage, like eye exams and dental care. They're often inexpensive-around $8 to $12 per month-and you can offer them as an option to individual employees. "The eye exam option might make sense if you have an employee base that's getting a little older," says Sam Gibbs, senior vice president and general manager of eHealthInsurance, an online resource for finding and comparing plans. "Dental riders might make sense for workers with young children."

Some providers offer extra services-which can be especially useful for small firms without human resource departments. For example, Aetna.com provides information about various medical conditions and different treatments, and helps covered employees track their out-of-pocket expenditures and deductibles. Bear in mind that premiums rise. "Find out how quickly a health carrier has increased rates for small business customers," says Cecelia Brock, PhD, a consultant with the Service Corps of Retired Executives (SCORE) and president of her own small business consulting firm in San Diego. That information should be available through your insurance agent or directly from the company.

While you're at it, make sure you buy from a reputable carrier-perhaps a well-known firm such as Aetna, PacifiCare, Blue

Cross/Blue Shield, or Health Net. Check ratings with A.M. Best (www.ambest.com) an independent firm that rates carriers' claims-paying ability. And beware of "defined benefit" health care plans. "If you have a heart attack, a defined benefit plan will pay a flat amount-maybe $10,000-and that's it," says Gibbs. "That won't do it."

Don't promise too much
You may wish to provide blue chip coverage to employees and their families-but make sure you can afford to do so. Otherwise, you'll have to reduce coverage, which can disappoint or even infuriate some employees. "When you start taking things away from people, that's when you start having employee relations problems," says Brock. Whatever coverage you choose, keep your staff informed about their coverage. "Communicate, communicate, communicate," says Adam Sturtevant, vice president of employee benefits for TD Banknorth Insurance Group in Portland, Maine. "Explain the value of your firm's health care benefits to employees. That way, they'll understand what you are doing in return for their contributions to the company."

True, it can be painful to write those premium checks. Choose your policy wisely, however, and your dollars will buy you happier, healthier, and more productive workers. What's more, you'll know that you're doing the right thing by the peoplewho make your business a success.

Reed Richardson is managing editor for Business 24/7.

Health Savings Accounts

SBOCTeam — Sun, 29 Jul 2007 23:39:00 GMT

By Reed Richardson

Created in January 2004 as part of the Medicare prescription reform law, health savings accounts (HSAs) are sometimes referred to as medical IRAs. These plans are increasingly popular and, according to a May 2005 study by American Health Insurance Plans, more than one million people are now covered under HSA-based health plans.Many insurance companies, local banks, as well as specialized administrators offer HSAs, but be advised, the fees charged to run these plans vary widely. For an online list of the top ten most affordable providers, go to www.hsafinder.com/07-05_1.shtml

How do they work?
Like IRAs, individuals contribute pre-tax dollars into accounts that are tied to a wide range of investment vehicles (savings accounts, mutual funds or, in some cases, stocks). These accounts can accrue interest and roll over any unused balances to the next year, unlike standard Section 125 or “cafeteria” medical benefits plans. These funds can be withdrawn from the HSA at any time, without penalty, to pay for legitimate medical expenses not typically covered by the insurer, such as office visit and prescription drug co-payments, vision expenses, and dental work. To see a list of federally approved expenses, go to www.irs.gov/pub/irs-pdf/p502.pdf

An important note: HSAs can only be used in conjunction with health-insurance policies that have steep annual deductibles—between $1,000 and $5,000 for individuals, or $2,000 and $10,000 for families—but these plans typically cover 100% of expenses once this limit has been met.

Who should look into HSAs?
Those who are self-employed and have been unable to previously afford health insurance will find that high-deductible, HSA-based plans offer significantly lower premiums, and are therefore more accessible, than most HMO and PPO plans. According to HSAFinder.com, a free informational website on HSAs, the average individual who chooses a high-deductible, HSA-based plan over more traditional health care coverage would save an average of $840 during the first year.

Likewise, small business owners who already provide their employees health care, but have seen their premiums skyrocket over past few years, could realize annual savings of between 20% and 60% by switching their employees to a shared-cost HSA-based system. For those businesses that have never been able to afford offering medical coverage to their employees, HSA-based health plans offer a low-cost method of adding health insurance to their company’s benefit package.

What are the costs?
The high-deductible health plans (HDHPs) that partner with an HSA have
premiums that range from $200 to $300 a month, or $2,400 to $3,600 a year, based on the number of dependents. Annual HSA contributions are currently capped at $2,650 for individuals and $5,250 for families. So, a family with high-end premiums that also uses their fully funded HSA to completely pay off their deductible would spend $8,850 for medical expenses in one year. This amount compares favorably to family health insurance costs using more standard health plans, which, according to the Kaiser Foundation, averaged $9,068 in 2003.

What are the advantages?
For employees and self-employed entrepreneurs, individually owned HDHP/HSAs offer complete portability of their health plans from job to job with no interruption in care. During periods of unemployment or low cash flow, HSAs can also be tapped to pay for monthly medical premiums in addition to routine health expenses. And because the individual, rather than the insurance company, owns the HSA, the funds can be saved up and used for other long-term, medical expenses as well as passed on
to a spouse tax-free after death.

What are the drawbacks?
From the insured’s perspective, funding a HSA may not be feasible because it requires a sizeable amount of liquidity to be effective. Additionally, the federal government has currently capped HSA contributions near the low end of the allowable deductible range, meaning there is still some risk of significant out-of-pocket health care expenditures. Finally, small business owners who force their workers to shift from a HMO or PPO-based plan to a HDHP/HSA without sharing the premium pay-ins risk being accused of cost shifting, which could alienate workers and erode morale.

Reed Richardson is managing editor for Business 24/7 magazine.