With healthcare costs on the rise, many small businesses are finding it difficult (if not impossible) to provide quality healthcare benefits for their employees.
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But before you walk away from the possibility of employee health benefits altogether, there is one more option you need to consider. They are called Health Savings Accounts, and they may offer a solution that will satisfy both your employees and your bottom line.
Health savings accounts are designed to give employees and their families a tax-free savings account that can be used for current and future medical expenses. Both employers and employees are permitted to contribute funds to an HSA, even though total annual contributions are limited to $2,700 for individuals and $5,450 for families (2006 figures). The catch is that HSAs must be used in conjunction with a high-deductible health plan, all of which have much higher copays and deductibles than typical HMO health plans.
Ultimately, Health Savings Accounts may - or may not - be a good fit for your business. Here are 5 key features of HSAs that will give you the information you need to decide for yourself.
1.High-Deductible Health Plan Costs
The monthly premiums for high-deductible health plans associated with HSAs are considerably less than other health plan options. That's one of the things that makes HSAs attractive to employers. However, the deductibles paid by employees range from $1,000 to $2,500 for individuals and from $2,000 to $5,000 for families - a hefty chunk of any family's annual budget.
2. Medical Savings Account Features
An HSA essentially works like a medical savings account for employees. Money can be withdrawn from the account for legitimate medical expenses. In addition to the standard allowable contribution, employees age 55 and older can contribute an additional $600 each year.
3. Tax Benefits
Contributions to HSAs are made on a pre-tax basis. In other words, as long as funds are withdrawn for legitimate medical expenses, they are never subject to federal taxation. But if the funds are withdrawn for another purpose they are subject to federal tax as well as an early withdrawal penalty.
Unlike a lot of other medical savings accounts, funds that remain in an HSA at year-end are not forfeited. Instead, they can be rolled over into future years without risk of forfeiture or penalty - as long as they are used to cover legitimate medical expenses. If not, standard penalties and taxes apply for roll-over portions as well as the amount contributed in the current year.
5. Retirement Option
HSAs have another special feature that makes them appealing to some employees. Amounts withdrawn from an HSA at age 65 or later are not subject to the 10% penalty that typically applies to non-medical withdrawals. To put it simply, after age 65 HSAs convert to a standard retirement account in which the employee is subject to tax on withdrawals, but nothing more.