Health Savings Accounts

As a small business owner confronted with spiraling medical insurance costs, you may well be wondering how you can provide health care benefits for your employees and yourself. Fortunately, the Health Savings Account (HSA), which was created as part of the 2003 Medicare Act, is a relatively affordable—and tax efficient—alternative to traditional managed-care company plans.

Qualification and Contributions

An HSA may be opened by anyone who has a qualified health insurance policy with an annual deductible of no less than $1,400 for individuals or $2,800 for families in 2020. As a business owner, you may choose to offer a high deductible health plan to your staff, or your employees can sign up for policies on their own.

Once an insurance plan is in place, you can start depositing money into your HSA. As an employer, you may want to contribute to the accounts of your staff or offer them incentives to put money in themselves.

Since HSA funds are intended to pay for out-of-pocket medical expenses not covered by insurance, you are permitted to make tax-exempt yearly contributions equivalent to the annual deductible for your health insurance, up to a maximum of $3,550 for individuals and $7,100 for families in 2020. If you are age 55 or older, you may make additional contributions of $1,000 in 2020. The accounts are owned by the individual and are fully portable from job to job.

The Tax Benefits

The tax advantages of the HSA are substantial. Contributions to and withdrawals from an HSA are tax free, provided the funds are used to pay for qualified medical expenses. The investment earnings within the account also grow tax free.

Any funds left over in your HSA at the end of the year can remain in the account, and you can start all over with your contributions. If you use little of the money in your account and continue to make deposits, you could end up with a substantial nest egg by the time you reach

retirement. Prior to age 65, non-medical distributions are taxed as part of gross income and are subject to a 10% penalty. After the age of 65, however, you are permitted to withdraw funds from an HSA for non-medical reasons by simply paying the income tax due.

Like any product, the HSA is not for everyone. Lower income workers may find it difficult to contribute the funds necessary to cover the insurance deductible. Also, employees who use medical services frequently, such as young families or people with chronic health conditions, would benefit little from the tax benefits. For these types of employees, traditional managed-care plans may be preferable. Depending on the needs of your staff and your own resources, you may want to offer several health insurance options.

When launching an HSA plan in your company, it is essential to explain to staff how these accounts can benefit them. Initially, some employees may balk at the high insurance deductibles associated with HSAs. But many may wish to open an HSA, especially if the company offers to pick up part of the cost. Higher earners, in particular, may be attracted by the considerable tax advantages offered by the HSA. Over time, your staff may come to appreciate the advantages of having greater control over their health care spending, and possibly seeing their account balances grow through regular saving.

Important Disclosures The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.