The case for HSAs: tax considerations for small business.

• Author: Hill, Jeffrey B.
• Position: Money Talk

The business community has been traditionally responsible for ensuring health insurance coverage for its employees. Generally speaking, individuals outside of the workforce and the self-employed have had to go without coverage, obtain public assistance or rely on their savings to pay for medical services and products. This employer-based approach to providing healthcare has worked out well during times of near-full employment, but the current period of extended unemployment and the recession has placed demands on the government for solutions.

Economic Environment

Recent developments impacting the economy include a housing price correction followed by a financial crisis, slow economic growth, extended unemployment, increased underemployment and inflation. Families are now experiencing a higher cost of living coupled with either wage reductions or wage stagnation.

In the healthcare insurance arena, this has resulted in employers passing premium increases onto employees and single individuals (who are generally healthier) opting out of their employer-sponsored health coverage altogether, leaving more risk to be assumed by the remaining group. This economic environment has resulted in more reliance on the public sector to provide health insurance coverage and a shift away from the employer-based approach.

Available Alternatives

The small business community has an opportunity to take an active leadership role in shaping what healthcare will look like going forward. The available alternatives include (1) traditional group health insurance coverage, (2) health reimbursement accounts (HRAs) or flexible spending accounts (FSAs), (3) health savings accounts (HSAs), retirement health insurance plans and (5) a hybrid approach, which gives employees an option of utilizing an HSA or allows them to continue using the employer-negotiated group plan.

There is not a one-solution-fits-all approach, so the approach taken will depend on a variety of factors including, most importantly, whether or not your business employs people.

HSA Defined

A health savings account (HSA) is a trust created exclusively for the purpose of paying the qualified medical expenses of a beneficiary. An HSA can only be established for the benefit of an eligible individual who is covered under a high-deductible health plan (HDHP). IRS Code Section 223 and other related primary source tax materials govern these situations.

An HSA arrangement consists of high-deductible insurance coverage...