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Health Savings Accounts (HSAs) For Small Business Owners

So, you've just got your health insurance rate increase. After dividing the increased amount by the amount you were paying, you see your health insurance is going up 20%. Yikes!

According to some sources, health insurance costs in the U.S. have been averaging about 16% per year for the last several years. According to an article in The Minneapolis Star Tribune (June 12, 2005) health insurance premiums are up an average of 59% over the last five years, making the annual average about 10%. Because of this, self-employed individuals and people without company-sponsored healthcare are looking for ways to reduce their healthcare costs and save money on health insurance.

If you operate a small business, it's important to note that health insurance is now tax deductible to all business owners and can be paid from pre-tax earnings. This is true whether you operate as a sole proprietor, an LLC, or a corporation. Paying health insurance with pre-tax earnings saves several thousand of dollars per year. (I discuss the value of paying for health insurance using pre-tax earnings in my book How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners).

Another common way to reduce insurance premiums is increasing your deductible. Your deductible is the amount you pay out-of-pocket before the insurance kicks in and begins covering you. But, there are some disadvantages to increasing your deductible.

Most people have regular checkups and other healthcare each year. This means you'll usually pay something out-of-pocket annually. (This is unlike homeowner's insurance, where you don't have little disasters regularly.) A high deductible might not be the best for someone with large, regular medical expenses. You want to be sure you save enough money to cover the deductible.

Recently, Congress and President Bush have created what are known as health savings accounts (HSAs). Health savings accounts are designed to allow people to save money in tax-deferred accounts. These accounts are coupled with purchasing a high-deductible health insurance plan.

In a way, an HSA is like an IRA. You receive a tax-deduction for your contribution (up to your deductible amount) and can contribute to the account using pre-tax earnings. This money can be used tax-free to cover qualified medical expenses. Or, if you're over the age of 65, the money can be used for anything, but you must pay income tax on any money not used for healthcare, just as if it were a withdrawal from a regular IRA or 401(k). The investment earnings in the account can compound tax-free.

Of course, there is the possibility that you'll spend all of your deductible annually. But, for those who anticipate saving a portion of the deductible annually, HSAs offer an interesting savings option.

So, where do you open an HSA account? Insurance companies, banks, and brokerage firms can offer them. For those who are younger and who want to invest aggressively in stocks or stock funds, a few stock brokerage firms are starting to offer HSAs.

In particular, Merrill Lynch offers an HSA.

Unfortunately, it seems many of the most popular discount brokerage firms still don't offer HSAs. This includes Vanguard and Charles Schwab. You can purchase Vanguard funds through benefit plans offered by other companies. And, there are several online companies that offer brokerage HSAs. But, I'm not familiar with those companies, so won't mention them. Many reputable banks and insurance companies offer HSAs, but alas, not stock investment options.

I checked Everbank.com to see if it offered HSAs. Apparently not. Ditto for some of the popular online brokerage firms. But, with health care costs rising so fast in America, investing part of your health savings in foreign currency or stocks might be a good idea. Money in HSAs can be invested in stocks, bonds, exchange-traded funds, or pretty much anything else, as long as the firm you open the account with allows it.

HSAs aren't for everyone. They seem most useful for healthier, younger with low annual healthcare costs who would like to save money for healthcare costs in the future.

HSAs don't address the underlying problems of rising healthcare costs in the U.S. The United States is ranked Number One in per capita spending in healthcare, spending $5,267 per person. Europeans average $2,282. According to the World Health Organization, the U.S only ranks 37th in healthcare performance. (Minneapolis Star Tribune June 12, 2005) (One reason for this is that Americans are soaked for prescription drugs, paying several times more than the rest of the world. See the book The Truth About The Drug Companies for more detail.)

Below are some resources to help you learn more about HSAs.

http://www.selfemployedweb.com/health-savings-account-overview.htm (Employee Benefit Research Institute says we need about $40,000 to $1.5 million saved for healthcare as we age.)

Shop for HSA Investments
http://www.kiplinger.com/personalfinance/columns/ask/archive/2005/q0228.htm

Health Savings Account Answers
http://www.kiplinger.com/personalfinance/features/archives/2004/02/hsa.html

http://www.centredaily.com/mld/centredaily/news/opinion/11765825.htm
This article discusses how healthcare costs affect business. In 2004, we learn GM spent $5.2 billion for healthcare costs for its retirees.

http://www.hsainsider.com/basics.asp
HSAInsider has some FAQs.

http://www.smartmoney.com/taxmatters/index.cfm?story=20031217

http://hsafinder.com/
has a list of account custodians (firms that handle HSA accounts).

http://hsafinder.com/finder/AccountCustodians.aspx
The list is somewhat awkward to use.

http://www.hcmpublishing.com/Investment/Chapter3-Becoming-Investor.html (From my book Becoming An Investor, this chapter discusses the power of compounding and how it affects portfolios.)

http://www.irs.gov/pub/irs-pdf/p969.pdf
IRS Publication 969 (PDF format).