Small business owners and their employees can stretch their dollars further by establishing a health savings account. With a health savings account, participants are empowered to save earnings and more wisely spend money on healthcare expenses. While it might be easy to assume this tax-advantaged account is a benefit available only to large companies, the option is also a possibility for small businesses.
What is a Health Savings Account?
What is a health savings account HSA, and why is it a good option for small businesses? An HSA is a tax-advantaged medical savings account that allows participants to save pre-tax dollars for future qualified medical expenses.
By using untaxed dollars to pay for health care costs like health insurance copays and deductibles, dental and vision expenses, prescription drugs, and certain other healthcare costs not covered by insurance, qualifying U.S. participants can stretch their earnings further while ensuring they have the funds they need when healthcare expenses arise. Balances can be carried forward from one year to the next, unlike some other health reimbursement arrangements.
Unlike a flexible spending account, an HSA for small business is available exclusively to individuals who have a qualifying health insurance plan, such as a high deductible health plan. Contributions to the HSA can be made by the individual, their employer, or both, and there are annual contribution limits set for each tax year. Providing a health savings account alongside an HDHP is a more cost-effective health benefit option compared to traditional health coverage.
Can a Small Business Have an HSA?
Even though small businesses with fewer than 50 employees are not required to offer health insurance as part of their benefits package, many choose to provide their workers with health savings accounts and a high deductible health plan.
Providing an HSA for small business not only benefits employees, but it also allows employer contributions to be tax-deductible. Additionally, since HSAs do not have contribution minimums, small business owners can determine the amount they wish to contribute. Employees can also set aside their own pre-tax funds to cover medical expenses, with all contributions easily managed through payroll deductions.
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Benefits of Health Savings Accounts
What are the advantages of HSA for small businesses? Americans who have a high deductible health plan can take advantage of a health savings account in numerous ways, including:
Pay for Many Qualified Medical Expenses
HSA account holders can use the funds to pay for a variety of qualified medical expenses, including deductibles and copays, dental expenses, and vision costs like eyeglasses and prescription drugs. The HSA offers the peace of mind that when future medical expenses are incurred, money is there to help pay for them.
Save on Taxes
Multiple Internal Revenue Service tax advantages exist for establishing a health savings account. When an employer adds tax-free money to an employee’s account, the donation can be claimed as a federal income tax deduction. When an employee deposits money into the account, it generally occurs as a payroll deduction in pre-tax dollars, so it reduces the employee’s taxable income. Then, when HSA money is used for qualified medical expenses, the funds are tax-free distributions.
Stretch Your Dollars
HSAs provide participants the opportunity to maximize their hard-earned money. By contributing pre-tax dollars to a health savings account, individuals can stretch their funds further. Without this advantage, the same amount of money would be subject to taxation, diminishing the amount available for healthcare expenses. Additionally, the funds in the HSA account earn tax-free interest while they remain there.
Control Healthcare Spending
An HSA empowers participants to take charge of their healthcare expenses. By contributing to an HSA account, employees have the flexibility to determine how and when to use the funds, including any contributions made by their employer. The money in the account is permanently owned by the participant, and it does not expire if it remains unused within a specific tax year. Moreover, employees can carry their funds with them if they switch jobs or health plans.
Invest for Retirement
Once an HSA participant reaches retirement age, they can utilize their funds for various purposes without incurring a tax penalty. Many account holders may opt to invest their HSA money in mutual funds to support themselves during their golden years. Alternatively, they can choose to save the funds indefinitely to prepare for future healthcare expenses.
Best Health Savings Account Options
Perhaps you’ve researched health savings accounts, compared to flexible spending accounts and other health care coverage, and you’ve decided an HSA is the best choice for your small business. Maybe you’ve even pored over health insurance acronyms trying to understand it all. Now it’s time to choose through what financial institution you’ll establish the HSA. Fortunately, a variety of options are available, each with its own benefits. Some of the most popular HSA choices include those from:
HealthEquity
Named one of the best financial institutions to provide HSAs, HealthEquity is popular since it lets customers invest in Vanguard funds with low expense ratios. HSAs with HealthEquity feature a mobile app with no account management fees, and the company offers accounts with no minimum investment threshold, so every dollar added to the HSA is invested right away.
The HSA Authority
The HSA Authority is a great option for family coverage thanks to its extensive online account management options that let users delegate financial tasks to other members. The online portal also features other web-based services including online bill pay, text banking, mobile deposits, and e-statements.
HSA Bank
It’s simple to open an HSA with HSA Bank thanks to no required minimum balance, and the task usually can be completed in less than 10 minutes. Users can invest their funds into TD Ameritrade or Devenir, and health savings accounts through HSA Bank feature no account management fees with at least a $3,000 balance.
Lively
With no fees to open or maintain an HSA, Lively is a great choice for opening a health savings account. Users can easily open and fund their accounts online, and they can invest their funds with TD Ameritrade. Lively’s mobile app even lets users track their HSA funds on the go, offering them maximum control over their investments as they use a free debit card to pay for qualified medical expenses.
Fidelity
With Fidelity, HSA account holders can invest their funds into high-quality or low-quality Fidelity mutual funds and index funds, and the service carries no account minimum balance requirements or account management fees. Fidelity HSA customers also receive a free debit card to pay for qualified medical expenses.
Further
Further has been called the best HSA provider for employers because of the varied types of accounts it helps to manage. Small business owners can choose Further to help oversee, for example, HSAs, flexible spending accounts, transportation reimbursement accounts, dependent care assistance programs and more. It’s a one-stop shop for employers adding investment and savings accounts to their benefit programs.
Optum Bank
Optum Bank has been recognized on the HSA Report Card’s shortlist of best HSAs for spenders. This designation is aimed at individuals who intend to use their funds for spending rather than saving or investing for the long term. Optum’s HSA offerings include an online tool for storing receipts, and users can even set their investments to auto-pilot, minimizing the effort required from the HSA account holder.
Elements Financial
Some HSA users will choose Elements Financial because they prefer a credit union as opposed to a corporate bank or large investment firm. Customers can set up an HSA, but they can also open a checking or savings account from the same institution. The Elements Financial HSA program features free debit cards to pay for healthcare expenses, as well as online banking and investment options.
How to Set Up an HSA for Your Small Business
Setting up a health savings account is a simple and straightforward process, but it’s important to follow the proper steps to comply with the Internal Revenue Service, much like other tax-favored health plans. Ready to start the processing of setting up an HSA? Just follow the following steps:
Determine plan eligibility – Ensure that you select a health plan that qualifies for HSA. It’s important to note that small businesses with fewer than 50 employees are not mandated to provide health insurance; however, they have the option to offer an HSA-eligible plan.
Decide on contributions – Will the business contribute to employees’ HSA plans, and how much will each participant contribute to their own health savings account? Employers can contribute any amount between $0 and the plan’s maximum contribution, and the contributions carry tax savings. Likewise, any contributions made by an employee are not subject to payroll tax.
Create a Section 125 cafeteria plan – By establishing a section 125 cafeteria plan, both employers and employees can contribute tax-free dollars toward their HSAs. This type of plan is available to employees, their spouses, and dependents, and it can be created by a business or a payroll service.
Manage contributions and tax documentation – The easiest way to manage HSA contributions and all the proper tax documentation is to employ the services of an HSA administrator, often available through the financial institution managing the health savings account.
Encourage employees to open an HSA – HSA accounts are owned entirely by the employee, and their participation is vital to offering the option as a small business. Make sure employees fully understand the tax benefits of establishing the HSA. Be sure and explain the basics of how an HSA works and how to use one, as well as what expenses are covered.
What is the best HSA?
The top provider of health savings accounts is HealthEquity. Account holders can invest in Vanguard funds with low expense ratios, and the provider features a user-friendly mobile app, a debit card for out-of-pocket expenses, and no account management fees. Additionally, HealthEquity has no investment threshold, meaning that every dollar contributed to an HSA is invested immediately.
What are the disadvantages of HSA?
Despite all its benefits, there are still some disadvantages of an HSA. Before establishing a health savings account for your small business, consider the following drawbacks:
HSA requires an HDHP for an insurance company – A High-Deductible Health Plan is required to qualify for an HSA, which can result in a greater financial burden than other types of health insurance.
HSAs can pressure account holders to save – Some people might be more reluctant to seek healthcare when they need it because they don’t want to spend the money in their HSA account instead of saving it for retirement.
HSAs can result in tax penalties – If not used properly, an HSA could result in a tax penalty. If funds are withdrawn for a non-covered expense before the age of 65, the money becomes subject to income tax and penalties.
HSAs require recordkeeping – Some individuals may hesitate to engage in an HSA for small business due to the necessity of maintaining receipts that verify withdrawals were made for qualified medical expenses.
Is HSA Worth it for Self-Employed?
A health savings account can be a good option for self-employed individuals in the United States. While many health insurance premiums might be too expensive for entrepreneurs and small businesses, high deductible health plans with a health savings account can be a more affordable option that still helps fund healthcare expenses and reduce taxable income since the money is paid before income tax is subtracted. An HSA can also serve a dual purpose, as unused funds can be saved for retirement.
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This article, “Health Savings Account (HSA) for Small Business – What You Need to Know” was first published on Small Business Trends