Providing a group health insurance plan can be a crucial factor in being able to retain valuable employees and attract new talent that will help your small business grow. Employees of firms large and small both consistently rank health insurance as the most sought after employee benefit.
Once you decide to offer group health insurance you then must choose what type of plan (or plans) you want to offer. The most common type of group health insurance plan is the Preferred Provider Organization (PPO) plan where doctors and medical facilities “in-network” provide services at a negotiated reduced rate to those enrolled in their health plan.
An increasingly popular type of health insurance is a High Deductible Health Plan (HDHP). Offering an HDHP to your small business employees effectively provides two valuable benefits. In addition to the health insurance coverage, an HDHP allows your employees to contribute money to a health savings account (HSA). An HSA offers unparalleled tax breaks for employees to set aside money to pay for out-of-pocket medical expenses.
Only enrollees in eligible HDHPs are allowed to contribute to an HSA.
Here’s why you should consider offering a health savings account as a benefit for your employees:
- Employees who contribute to an HSA get an upfront tax break. The money an employee contributes is pre-tax. Every dollar they contribute will reduce their taxable income. Right off the bat that’s a nice employee benefit. An added benefit for you, the employer, is that you do not owe your share of payroll tax on money an employee contributes to an HSA. If you choose to contribute to workers’ HSA accounts –although not required —your employer contribution is exempt from federal income and payroll tax.
- Employees can pay out of pocket medical costs with tax-free dollars. A reality of our current health care system is that insurance plans typically only pay a portion of covered expenses. Households are on the hook for deductibles and co-pays. Money an employee has saved up in an HSA can be withdrawn tax-free to pay for qualified medical expenses. (Here is a list of qualified medical expenses.)
- It reduces the cost of uncovered vision and dental care. Many standard health insurance plans do not provide vision or dental care. Employees with an HSA can use tax-free dollars to pay for these health care services.
- It’s a permanent rainy-day fund for medical expenses. Unlike a flexible savings account (FSA), there is no use-it-or-lose-it policy with an HSA. Money an employee contributes to an HSA can be used to pay current medical bills or it can be left in the account for next year’s medical expenses, or to cover health care bills decades from now.
For employees who choose to pay for their current medical expenses from their regular earnings or savings, an HSA can become a valuable part of their retirement plan. While Medicare covers the bulk of medical expenses, retirees face sizable out-of-pocket medical costs.
Money an employee sets aside today in an HSA can be withdrawn — again, tax-free — to pay for qualified medical expenses in retirement. For instance, in 2020 the standard monthly premium for Medicare Part B (coverage for doctor’s appointments, and outpatient care) is $144.60, but retirees with high income pay more than $450 a month. Those premiums can be covered with tax-free HSA withdrawals.
Another valuable retirement benefit is that HSA savings can be used today to pay the annual premium for a long-term care insurance policy.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.