Publications

• 30 Second Ideas
• Accounting Updates
• Alerts
• Articles
• Business Surveys
• Construction Edge
• Healthcare Edge
• Insurance Edge
• Legal Talent
• Manufacturing Edge
• Not-for-Profit Edge
• Quick Links & Good Ideas
• SEC Edge
• Strategy Insights Blog
• Surviving the Upturn
• Tax Highlights

Tax Strategies for Providing Employee Health Coverage

Health insurance can be one of the biggest employee benefits a business provides—and one that employees most expect of their employer. Today, with health insurance costs rising more than 10% a year, employers are looking for health plans that offer tax breaks. One such option is a high-deductible health plan, or HDHP.

How do HDHPs work?

HDHPs are just like ordinary health insurance plans, except that the employee must incur a higher out-of-pocket cost before benefits begin.

How high is the deductible?

For 2008, an HDHP is defined as a health plan with an annual deductible of at least $1,100 for individuals and $2,200 for family coverage. The maximum out-of-pocket medical expense cannot exceed $5,600 for an individual and $11,200 for a family, including the deductible.

With the much higher deductible, the cost of medical insurance decreases—in many cases, dramatically.

Health Savings Accounts help pay out-of-pocket costs

Individuals covered by an HDHP may establish a Health Savings Account (HSA) on their own or in conjunction with their employer. Any amounts in the HSA may be used for qualified medical expenses.

How much can be contributed to an HSA?

For 2008, the maximum annual contribution to an HSA is $2,900 for individuals and $5,900 for family coverage. Employees age 55 or older may contribute an additional $900 for 2008.

HSAs offer tax savings

HSA contributions are pre-tax if an employer makes contributions for the employee or tax-deductible by the employee if self-funded. Contributions to an HSA can be partially funded by an employer and employee.

HSA earnings accumulate tax-free

An HSA is a tax-exempt trust much like an individual retirement account, or IRA. Amounts in an HSA may be invested and earnings accumulate tax-free. Some higher-income taxpayers may choose not to use the funds in their HSA and accumulate the money each year.

What happens to HSA funds at age 65?

At age 65, unused funds in an HSA may continue to be used for medical expenses or may be withdrawn and used for retirement. Federal income tax will be charged for non-medical withdrawals after age 65. There is also a 10% excise tax for non-medical withdrawals before age 65.

Who can benefit from an HDHP?

Often the monthly cost of insurance plus out-of-pocket expenses of an HDHP is fairly close to that of a low-deductible health plan for those who incur large medical expenses. However, HDHP plan participants may decide to fund their out-of-pocket medical expenses from other sources and grow their HDHP funds tax-free.

Younger employees who do not normally incur as much in medical expenses could come out ahead by utilizing an HDHP. Employers should explain HDHPs to their employees and help them "run the numbers" to determine if an HDHP makes sense for them. It often does.

Another option: Health Reimbursement Accounts

Health Reimbursement Accounts (HRAs) are health plans set up, controlled and funded by the employer. There is no limit to how much an employer may provide for each employee under an HRA arrangement and there are no standard plan requirements.

Even if you don't have an employee insurance plan, you can offer an HRA

An employer does not need to have a traditional health insurance plan to provide coverage under an HRA. For instance, the employer may decide to increase the health insurance deductible and not pass on that full increase to the employees.

Any funds reserved for an HRA belong to the employer. Employees have no right to those funds other than by coverage terms described in the HRA.

Who can be covered by an HRA?

For HRA purposes, the term "employee" does not include a self-employed individual. This excludes owners and employees of sole proprietorships, partnerships and greater than 2% owners of S corporations from establishing an HRA for themselves.

For more information, contact Mike Calahan at 312-980-2996 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.