Health Savings Accounts - Cutting Health Insurance Costs for the Self-Employed?

How can a Health Savings Account (HSA) reduce health care costs for your small business?

When combined with a high deductible health plan, an HSA can lower your monthly premiums and give you several thousands of dollars worth of tax breaks each year.

Higher Deductibles, Lower Monthly Premiums
Health Savings Accounts go hand in hand with a type of health insurance policy called high-deductible health plans (HDHP).  The name is kind of scary, who wants to risk paying high deductibles?  Well, there’s a good reason why HSA’s are tied so closely with high deductible plans.

As you well know, in the insurance world higher deductibles result in lower monthly premiums.  So you save money on insurance premiums each month by accepting the risk of having a high deductible. This is where a health savings account comes into play, it helps reduce the financial risk of paying increased insurance deductibles.

Health Savings Account Tax Breaks
If you’re enrolled in a high-deductible health plan and an HSA then you can contribute the dollar amount of your deductible into your HSA each year.  So although there’s a risk you may have to pay the entire insurance deductible, you can make payments for it out of your HSA, all of whose contributions are tax deductible when calculating your adjusted gross income. Let look at an example:

If your annual insurance deductible was $2500, you could put $2500 into your health savings account.  That contribution is tax deductible whether you spend any of it or not, whatever amount you don’t spend simply accrues in your account.

That’s one of the great features about HSA’s, the money you put in can grow tax-deferred and can be used anytime for medical expenses.  Any amount you don’t spend can be used penalty-free after age 59 1/2 for retirement.

Lowering Health Insurance Costs
So if you’re wondering if health savings accounts can save your small business money, the answer is, it depends…..

For healthy people with minimal health care expenses that are mostly interested in catastrophic coverage, a health savings account coupled with a high-deductible health plan is a great way to lower your costs and build up your health care expense fund.  If you’re faced with high medical bills year after year due to recurring health care issues then a  health savings account is probably not for you.  So what about people in between those two extremes?  Check back for a later article covering additional considerations and benefits of health savings accounts.