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Save Money with Health Savings Accounts

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When Tony Bonfe, owner of Bonfe’s Auto Service and Body Repair of St. Paul, Minn., began offering his 35 employees health savings accounts (HSAs) three years ago, his insurance agent warned him he might lose employees. But the 50,000-square-foot, two paint-booth shop has not lost any workers solely because HSAs are the only option. In fact, most employees are happy, and Bonfe describes his HSA experience as “awesome.”

HSAs are the fastest-growing product in the health benefits industry, and the high-deductible health plans (HDHPs) that go along with them dramatically lower costs for employers while employee-owned accounts provide control and freedom for routine health expenses.

“Those who don’t spend the deductible can roll over the amount in their account,” Bonfe says, “and they don’t have to contribute up to the deductible next year.”

WHAT IS AN HSA?

HSAs were first offered in 2004, under the Medicare Prescription Drug Improvement and Modernization Act. These high-deductible insurance plans allow employees to contribute pretax dollars to a savings account. Employers may match employee contributions. Any unused cash belongs to the employees.

In Bonfe’s case, the business pays 75 percent of the cost of insurance and contributes part of the money saved by switching to HSAs. Obviously, healthy employees—those who do not dip into the account to cover medical expenses—benefit most from this arrangement.

When an employer contributes to a worker’s HSA, those amounts are ignored by the worker for tax purposes. The employer is not required to withhold payroll taxes on contributed amounts and may deduct them as payments made for a fringe benefit plan.

On the downside, there are limits on the amounts that may be contributed to an HSA each year. In the 2009 tax year, for example, an individual can contribute up to $3,000. An individual with family coverage is allowed a contribution of $5,950. And a so-called catch-up contribution is available for workers 55 or older: They can contribute an additional $1,000.

HIGH-DEDUCTIBLE HEALTH PLANS

HSAs require the use of an HDHP. Those health plans have certain requirements for deductibles and out-of-pocket expenses. In 2009, the minimum annual deductible amount is at least $1,150 for self-only coverage, or $2,300 for family coverage.

In addition, the annual out-of-pocket expenses under the HDHP cannot exceed $5,500 for self-only coverage or $11,000 for family coverage. Out-of-pocket expenses include deductibles, co-payments and other amounts (other than premiums) paid for plan benefits.

WHAT’S IN IT FOR THE BUSINESS?

Businesses like HSAs because they shift costs to employees. “Bottom line: With HSAs, we save,” Bonfe says. Darrell Amberson, owner of Lehman’s Garage Inc. in Minneapolis, agrees. Lehman’s added HSAs to the conventional plans it offered its 115 employees several years ago.

“I was advised that HSAs were not a good fit for all,” Amberson says, “because high-deductible insurance is unaffordable to many employees, especially those with families or existing health problems.”

Both Bonfe and Amberson arranged the HSAs with their insurance agents.

“Bottom line: With HSAs, we save.”
—Tony Bonfe, owner, Bonfe’s Auto Service and Body Repair

WHAT’S IN IT FOR EMPLOYEES?

Although deductibles are high, HSAs offer great coverage. Plans usually pay 100 percent of medical expenses once the deductible has been reached, as well as paying preventive-care costs. There are no co-payments.

Another perk: a worker who is generally healthy and doesn’t rack up many bills can stash a lot of money in an HSA, saving for later in life, when medical bills are more likely to mount. Admittedly though, sorting out the details of consumer-driven health care can be tough. It took Bonfe’s workers a year to fully understand their HSAs.

Perhaps the scariest thing about HSAs is the market risk. HSAs work like a 401(k) plan, investing contributions in a mutual fund or other savings vehicle. With all markets bearing some volatility, there is a financial risk to paying for health care in this way.

THE TAX SCOOP

It’s smart to seek advice from an accountant or tax lawyer for insight into that aspect of HSAs.

Under current tax rules, a self-employed collision repair professional may deduct 100 percent of amounts paid for health insurance for themselves, spouses and dependents. The deduction cannot, of course, exceed his or her net income (minus 50 percent of self-employment tax and/or contributions to qualified retirement plans) from that work.

The tax treatment of fringe benefits paid to employees of an S corporation is different for owner-employees than for other employees. Fringe benefits paid to S corporation employees who are not shareholders, or who own 2 percent or less of the outstanding S corporation stock, are tax-free. They can be excluded from the employee’s taxable wages and are deductible as fringe benefits by the S corporation.

Employee-owners owning more than 2 percent of the S corporation stock, on the other hand, are not employees for benefit purposes, and their benefits may not be tax-free. Generally, greater-than-2 percent owners are treated in the same manner as partners in a partnership.

In other words, premiums paid by a partnership for a partner’s health or accident insurance are generally deductible by the partnership and included in the partner’s gross income. As an alternative, a partnership may choose to account for premiums paid for a partner’s insurance by reducing that partner’s distributions; in this case, the premiums are not deductible by the partnership and all partners’ distributive shares are unaffected by payment of the premiums.

A partner can deduct 100 percent of the cost of health insurance premiums paid on his behalf. Similarly, an owner-employee who owns more than 2 percent of the S corporation stock can deduct 100 percent of the amount paid for medical insurance for himself, his spouse and dependents.

SORTING IT OUT

Proponents contend that the lower premiums of HSAs and their tax-free savings potential will appeal to many workers while the health plans’ high deductibles encourage enrollees to be more astute health care consumers.

Critics are concerned that HSA-eligible plans attract enrollees who seek lower premiums but lack the resources to contribute properly to an HSA.

Congress’s watchdog agency, the Government Accountability Office, recently found that the number of people covered by HSA-eligible plans has increased from 438,000 in September 2004 to an estimated 6.1 million in January 2008.

Clearly, many Americans have decided that HSAs are the way to go. But the question that really matters is whether an HSA is right for you and your collision repair business. The Automotive Service Association may be able to help you with that: Check out TakingTheHill.com for coverage of a congressional hearing on “Health Care Reform in a Struggling Economy: What’s on the Horizon for Small Business?” One recommendation from the session: Compare all health care options available, such as HSA plans.

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