Which Health Plan Is for You
Health insurance costs are high and only going higher. What choices do you have if you want to provide health coverage for yourself and your staff? There is now a wide array of options to consider: Health savings account (HSAs), health reimbursement accounts (HRAs) and flexible spending arrangements (FSAs). Which one is best for you?
Factors in plan selection
The factors you should use in selecting the best medical plan include:
- Cost (medical insurance and plan contributions). Which type of health coverage should you carry? Who should make plan contributions?
Convenience (managing the account, including administration of disbursements). Who sets up and runs the account and decides on whether disbursements should be made?
Employee morale (account portability and flexibility). What happens to funds at the end of the year? What can funds be used for?
Health savings accounts (HSAs)
This new type of medical coverage plan, which went into effect on January 1, 2004, combines a high-deductible health insurance policy with a special savings account, called an HSA. You can set up HSAs only if you carry this type of coverage. You don’t have to contribute to employees’ accounts, but if you do, this must be done on a nondiscriminatory basis. Funds contributed to an employee’s account belong to the employee; he or she can take them and all the earnings on leaving employment.
Contributions, which are limited by law, are fully deductible. For 2004, the limit is up to $2,600 for an employee with individual coverage and $5,150 for an employee with family coverage. (There’s an additional $500 catch-up contribution permitted for anyone age 55 or older by the end of the year.)
Since employees own their accounts, you do not have to review claims submitted for reimbursement. It is up to each employee to keep track of the purpose of withdrawals by retaining receipts and other proof of medical treatment. Withdrawals for nonmedical reasons are permitted, but the funds are taxable and subject to a 10% penalty (unless the employee is disabled or eligible for Medicare).
The rules for HSAs are just now being fleshed out. For links to developments on HSAs, go to www.irs.gov/newsroom/article/0,,id=97322,00.html.
Health reimbursement accounts (HRAs)
This is a bookkeeping entry account set up by a company on behalf of each employee. You decide how much to allot to each account every year (e.g., $1,000, $2,500); there is no limit fixed by the IRS.
Employees can then tap into these accounts to pay for medical costs not covered by insurance by submitting proof to you of a medical-related payment. No withdrawals from HRAs are permitted for non-medical reasons. Amounts not used this year can be carried forward to pay medical costs in future years.
You don’t have to carry specific type of health coverage. However, companies that are now offering HRAs have switched to high-deductible policies, saving money overall.
Flexible spending arrangements (FSAs)
You can shift the cost of paying medical expenses to employees by offering an FSA. Employees commit a fixed portion of their salary to an account created on their behalf. There is no contribution limit fixed by law; you set a limit in your FSA plan.
Contributions are treated as salary reduction amounts (employees don’t pay income tax on this portion of their wages). But amounts not used by the end of the year currently are forfeited to the employer (this may be changed in the future).
Like HRAs, funds from FSAs can only be used for medical expenses; employees must submit to you proof of a medical-related payment. The arrangement can define the scope of eligible medical expenses (but insurance premiums are not reimbursable).
For a free guide to health insurance options for small business, go to http://covertheunisured.org/materials/business/BusinessGuide.pdf.
