The Affordable Care Act (ACA) eliminated most small business health plans that allowed employers to reimburse employees’ individually purchased health insurance. This led to many small business owners to remove health coverage or adopt health savings accounts (HSAs) as an alternative to traditional reimbursement plans.
There were more than 35 million HSAs active in the United States as of 2022, with assets amounting to roughly $104 billion. These numbers are expected to increase to around 43 million and $150 billion by the year 2025.
A health savings account (HSA) enables employees to contribute tax-free income toward a special savings account. It’s similar to an IRA or 401(k) in terms of how contributions are made before income taxes.
To open an HSA, the employee must have high-deductible health insurance. Annual contribution limits as of 2023 are $3,850 for individuals and $7,750 for families. These limits should increase slightly in 2024. Users who are 55 or older by the end of the calendar year are allowed to contribute an additional $1,000 beyond the normal caps.
HSAs comes with substantial tax benefits for users, including tax-deductible contributions, tax-free earnings within the savings account, and tax-free withdrawals for qualified health expenses. Monies not taken out of an HSA can continue earning interest like a traditional savings account. Once you reach Medicare age of 65, the funds can be withdrawn and be used to pay income taxes or be used for qualified medical expenses. Withdrawals after this age are completely tax free. Monies taken out before Medicare age will be subject to income taxes.
If you have a non-high-deductible health plan that overlaps with a high-deductible plan, you will not be eligible for HSA contributions. In addition, HSA contributions cannot be made if you are contributing to a general-purpose healthcare flexible spending account (FSA) in the same year.
HSAs can offer different investment options like an IRA, though there could be limitations based on the account trustee. They are trust or custodial accounts set up through banks, insurance companies or brokerage firms. Business owners will want to explore their options and find the account solution that is best suited for their benefits plan and employee needs.
HSA benefits continue to evolve and become more attractive for small business owners and their employees as group health plans get more expensive and complex. This may be the right option for your business.
To learn more about health savings accounts (HSAs) and for help with getting the most out of your benefits package for your small business, contact the team at Illumination Wealth today.