How Health Savings Accounts Work for Self-Employment
HSAs are simple, right?
An HSA is basically an IRA for healthcare coverage (and unlike an FSA, an HSA is fully portable), but before you apply for an HSA you will need to enroll in HDHP, so call your insurer ASAP…
Health Savings Accounts (HSAs) are supposed to make life easier for small business owners and their employees, but parsing all the jargon, acronyms, and doctor-speak can be a hassle. First, let’s lay out a few basic terms.
What Exactly Is an HSA?
An HSA is a form of consumer-directed health insurance. HSAs pair low-cost, higher-risk healthcare coverage with tax-free savings accounts for medical expenses.
HSAs are designed to reduce the cost of health insurance for small business owners and their employees, while providing affordable coverage for major health and medical expenses. Primarily, HSAs are an attractive option for young employees and healthy workers who require infrequent care.
But before you can apply for an HSA, you need to enroll in a high-deductible health plan (HDHP). The name says it all—an HDHP is a low-cost, high-risk health insurance plan with a minimum annual deductible of at least $1,200 for an individual and $2,400 for a family.
The high-deductible, low-premium model encourages frugality (if your premium is high, then you won’t run to the doctor every time you have a sniffle), while protecting employees from the financial burden of big medical bills.
Similar to an IRA retirement savings account, you can invest the money in your HSA account in mutual funds or bonds, and your earnings are tax-free, provided that you use the money to pay for legitimate medical expenses, such as deductibles and co-payments.
At the end of the year, your investment simply rolls over. For 2013, the maximum annual contribution for an individual is $3,250.
Is an HSA Good Business?
Since 2002, employer healthcare costs have outpaced inflation by a factor of five. It now costs about $500 per month to insure a full-time employee (including the boss), according to the National Association of Health Underwriters.
Small business owners struggle just to pay their bills—they can’t afford to spend thousands of dollars on insurance. That’s why nearly half of all small business owners (including solopreneurs and freelancers) decide to forgo insurance altogether.
But the effects can be disastrous—medical bills, even for routine procedures, can quickly climb into the tens of thousands.
The big question: Does business really stand to benefit from an HSA? Well, that all depends (on your health, on your insurance needs, and on your business structure), but for many solopreneurs and small business owners, HSAs are a low-cost alternative to traditional health insurance.
Here are a few benefits of HSA healthcare coverage:
- Contributions are tax free, as are payouts for qualified medical expenses
- Savings are controlled and managed by the owner of the account—no more contributions to a healthcare plan you never use; you save what you want to save, and no one tells you how much to contribute
- HSA savings are tied to an individual, rather than a business, so you can maintain your account even if you close your business and move on to a new project
- Savings roll over from year to year; your accumulated savings never expire
- Employer contributions to HSA accounts are exempt from payroll taxes
- Accumulated interest and dividends are tax-free or tax-deferred
HSAs are well suited to small and medium-sized businesses that cannot afford traditional group coverage. If you are self-employed and paying out of pocket for insurance, then you can lower your overall insurance costs and increase your financial flexibility by enrolling in an HSA—but be sure to make regular contributions to your tax-free account.
In the event of an accident or medical emergency, you will be expected to pay out of pocket for initial costs and expenses. For instance, if your deductible is $1,500, then you need to have at least that amount on hand, either in your tax-free HSA account or in a personal savings account.
Start saving now (the sky is the limit, and every penny that you put away will be waiting, with interest, after you retire) and your future will be happy, healthy, and, most importantly, covered.
Learn more about HSAs – and even get one – from our pals at EHealth.