Health Savings Account (HSA) Option for Small Business Owners and What HSA Bank To Use

Health Savings Account (HSA) Option for Small Business Owners

In my opinion one of the scariest things about being self-employed is health care coverage especially if you have a family.  Obtaining reasonable health care coverage with affordable premiums is a problem that plagues many small business owners since you will probably end up with a high deductible plan.  With that said one of the best things that you can take advantage of is the Health Savings Account (HSA).  Another huge issue is choosing a HSA Bank.

I have little doubt that this would be an advantage to you in the long run but funding it the short term has been a challenge in the past for me.  Hence all my articles on the importance of cash flow management.

HSA Advantages

  • Contribute funds tax-free into an HSA bank account that grows tax-free.
  • Distributions from an HSA bank account are tax-free, if used to pay qualified medical expenses for yourself, spouse, or dependents.
  • Since contributions are used to pay medical expenses you can deduct them on your tax return without itemizing your deductions.
  • Contributions remain in the HSA bank account from year to year until you use them unlike the Flexible Spending Account (FSA) usually offered by employers.
  • Contributions can be made until April 15th of the following year.  For example, HSA contributions for 2014 can be made until April 15, 2015.
  • If you are self-employed as a sole proprietor, partner, LLC member, or S corporation shareholder-employee, you can generally deduct your HDHP premiums which above and beyond the separate HSA contribution deduction.
  • After age 65 you can continue to use the HSA bank account to pay for qualified medical expenses tax-free or withdraw the funds from the account for other purposes paying ordinary income tax rates (no penalty).
  • Essentially, if you contribute to the HSA and don’t use the funds thus letting it build year over year then you have created another retirement fund much like an IRA.

How to Qualify for HSA

  • Must be covered by a high deductible health plan (HDHP), which if you are a small business owner is what you will most likely be forced to take.  For 2014, a HDHP has a minimum annual deductible of $1,250 for self-only coverage or $2,500 for family coverage. For 2015, a HDHP has a minimum annual deductible of $1,300 for self-only coverage or $2,600 for family coverage.  Consult your insurance company to see if you health plan qualifies for an HSA.
  • No other health coverage except the HDHP.  This does not include vision, dental, long-term care, etc.
  • Not enrolled in Medicare.
  • Not claimed as a dependent on someones else’s tax return.

What HSA Bank to Use

  • In most states, more insurance companies and banks are now offering qualifying coverage as HSA bank custodians.  Check and see what interest rates or investment options are offered prior to opening the account.  Remember this can be an investment vehicle, like an IRA, if you have low medical costs.
  • I have an HSA bank account through Alliant Credit Union.  I searched high and low but the following convinced me to go with Alliant.
    • High dividend rate of 0.65% APY with an average daily balance of $100 or more
    • Easy access to funds via a free VISA® HSA Debit Card or HSA checks
    • Free HSA checks
    • No fees for account opening, maintenance or transactions
    • No initial deposit or minimum balance requirement
    • HSA Investment Program – With Self-Managed Investing

HSA Limitations

  • Of course there are limits to the amount that can be contributed to an HSA.  For 2014, you can make tax-free contributions to an HSA of up to $3,300 for self-only coverage or $6,550 for family coverage.
  • Like the IRA, if you are at least 55 by the end of 2014, then you can contribute an additional $1,000.
  • Once you enroll in Medicare, you can no longer contribute to the HSA bank account.
  • Expenses that you have before the HSA is established are not qualified medical expenses for HSA purposes.  This happened to me because I established the HSA after we had our second child.  So I messed this up with poor planning but alas children bring the unexpectant, right?
  • If you receive distributions for reasons other than qualified medical expenses then that amount is subject to an additional 20% tax.

In the long run the HSA is one of the few ways that a small business owner can actively make health insurance costs more palatable.  So check with your health insurance company to see if you current plan is qualified for a HSA.  If you and your family are a healthy bunch then this is an excellent long-term option to increase your savings and investments.  Just choose the right HSA Bank and get started.

Have you explored another HSA Bank?

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