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Body_HSA.jpgby Sherron Lumley.

 

A health savings account (HSA) is an option available to small businesses that when used in combination with a high-deductible health plan (HDHP) provides an affordable way to offer medical benefit to employees. For the employer, there is a significant benefit—contributions made to an employee’s HSA are tax deductible. For the employee, the benefit from the employer is not considered part of gross income for tax purposes, so the funds contributed are not subject to federal income tax. Funds in the account belong to the employee from day one and accumulate if not spent from year to year.

 

“The HSA is very easy and efficient to set up,” says Sandy Abalos, CPA and small business owner of Abalos & Associates, a full-service accounting firm in Phoenix, Ariz. “I have 15 employees and we have an HSA plan here,” she notes.  “We pay 100 percent of the cost of the health plan deductible.  As the employer I can make contributions for the employees that are deductible to me.”

 

HSAs are a bit of a hybrid between flex spending accounts and individual retirement accounts (IRAs). They first became available in 2003 and have since experienced a slow, but steady adoption rate. The 2011 census released by America’s Health Insurance Plans, Center for Policy and Research showed 11.4 million people in the U.S. were covered by HSAs.

 

PQ_HSA.jpg“The HSA is like a medical IRA,” says CPA Sandy Abalos. “The money is not a use-or-lose situation.  It is [the employee’s] and the account goes on even if they change jobs or insurance coverage.” And much like an IRA, an HSA is established through annual contributions, which can be up to 100 percent of the plan's deductible amount or up to the maximum contribution levels determined by the Internal Revenue Service (IRS) each year. Details about contribution level limits are regularly updated in IRS publication 969.

 

Health savings accounts are managed by HSA trustees, usually a bank, insurance company or other financial institution. Typically, there is no charge for setting up the HSAs for employees. 

 

“Every employee has their own HSA account,” Abalos explains. “You set it up with a bank or insurance company, there is no application or authorization needed from the IRS, and no other fees.”

 

No other insurance allowed—with exceptions

However, in order to prevent people from obtaining the financial benefits of an HSA while protecting themselves with other health insurance plans, the law restricts the other coverage one may have. There are some exceptions, though, such as auto and life insurance, accident insurance, insurance for a specific disease or illness, and insurance that pays for a fixed amount per day for hospitalization. 

What else is new?

“What’s new is not necessarily positive,” says Abalos. “Before 2011, you could pay for over the counter (OTC) medicines with an HSA,” but now this is not the case.  As a result, small business owners should be aware that starting with tax year 2011, a medicine or drug will be a qualified medical expense only if it meets one of the following three criteria:

 

  1. Requires a prescription.
  2. Is available without a prescription (an over-the-counter medicine or drug) but you still get a prescription for it.
  3. Is insulin.

 

Insulin is now the only OTC medicine approved for reimbursement in 2012 without a prescription. The penalty of 10 percent for ineligible expenses paid with HSA funds increases to 20 percent in 2012.

 

New contribution limits:  In 2011, the IRS introduced new contribution limits of $3,050 for individuals or $6,150 for families. The annual catch-up limit for those 55 years of age and older is $1,000 (single or family). 

 

In 2012, these contribution limits will be raised to $3,100 for singles and $6,250 for families.  The catch-up limit (55 and over) stays the same at $1,000 for singles or families.

 

The new HDHP Minimum Required Deductibles:


Self: $1,200
Family: $2,400
HDHP Out-Of-Pocket Maximum - Family: $12,100
HDHP Out-Of-Pocket Maximum - Self: $6,050

 

An HDHP plan typically has lower premiums than a traditional plan. “Premiums were out-of-control and sky-rocketing,” recalls Abalos. “I asked myself, ‘If I were an employee, what would I like?’” She says that the HSA was an option that allowed her employees to have a health insurance plan with good coverage, but was still affordable.

 

“We pay 100 percent of the premium—that’s the amount that I put in the employees account,” says Abalos. “The money is not a use-or-lose situation,” she adds.  “It is theirs and the account goes on even if they change jobs or insurance coverage. It’s a great opportunity.”

 

Sidebar:  Additional HSA Resources:

 

 

 

For more HSA questions, try these IRS helplines:

1-800-829-1040 for individuals

1-800-829-4933 for businesses

 

As always, since every business's situation is unique, we recommend consulting a qualified tax advisor.

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