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Small Business Advisor: Taming Health Insurance Premiums

Now that open enrollment season for health insurance policy elections is almost here, it's an opportune time to help small-business clients loosen the chokehold of exorbitant premiums.

Now that open enrollment season for health insurance policy elections is almost here, it's an opportune time to help small-business clients loosen the chokehold of exorbitant premiums. Many financial pros are finding that a viable alternative is a health savings account (HSA), which is akin to a 401(k) or IRA for medical expenses and retirement savings.

“Nearly one-half of today's small businesses don't have health insurance, those that do have no buying power, and premiums have increased by an average of 88 percent since 2000,” says JoAnn Laing, author of The Small Business Guide To HSAs, and president of Information Strategies Inc., a Fort Lee, N.J-based marketing and media firm that studies the HSA marketplace. It's no surprise that most small-business owners are distressed over health care, and that close to 400,000 small businesses are expected to curtail employee health benefits this year alone.

In an effort to tame unwieldy health insurance premiums, many small-business owners are turning to plans that combine the HSA with so-called high-deductible health plans (HDHPs). HDHPs, naturally, have high deductibles, which means they have lower premiums. HSAs were created by Congress as part of the Medicare reform package to reduce health care insurance costs for individuals and employers, and became available to the public in early 2004. Today, 6.1 million people are covered by HDHP/HSAs, according to a report recently released by American's Health Insurance Plan, a Washington, DC-based national association of health insurance providers. The fastest growing market for HSA/HDHP products is small-group coverage, which now accounts for 30 percent of new enrollments.

HSAs: The Main Attraction

HSAs offer triple tax advantages for employers. Money deposited into the account is an “above-the-line” deduction, which reduces gross income. The maximum-allowed contribution to an HSA for 2008 is $2,900 for individuals and $5,800 for families. Funds may be used to pay for qualified medical expenses at any time without federal tax liability. Like funds in an IRA, the money grows tax-free. Taxes are incurred only if money is withdrawn for non-medical expenses, except for individuals over 65. HSAs are not subject to the use-it-or-lose-it regulations of flexible spending accounts and unused balances and interest can be rolled over to subsequent years.

“We are seeing more financial advisors who understand the value of HSAs,” says Laing. And they are increasingly espousing the virtues to small-business owners. Some are selling HDHP/HSA products, others are creating alliances with insurance brokers for referrals, and a small number of independents are even obtaining insurance licenses themselves.

J. Patrick Collins Jr., a certified financial planner and principal at Greenspring Wealth Management Inc. of Towson, Md., frequently refers his small-business clients to an insurance broker to narrow appropriate plan options for his small-business clients.

He then analyzes the broker's recommendations. “We look at different plans [including HMOs, PPOs and HSAs] and determine which is best for the client based on tax ramifications and possible expense scenarios,” says Collins. “We are finding that the HSA is often the best choice for most of our clients.” A quick discussion can easily rule out less favorable candidates, which include persons over 64 years, and those with a significant medical history or chronic condition. The minimum annual HDHP deductible is $1,100 for individuals and $2,200 for family coverage. Nonetheless, “The costs are reduced so much that even by paying the premiums and full deductible, it's less expensive than the alternative.”

Some clients simply prefer to use their HSA as a revolving door, and maintain a money market account to cover immediate out-of-pocket medical expenses for doctor co-pays and prescription drugs, the deductible or to cover long-term-care premiums. Instead, he encourages consideration of the HSA as an investment vehicle, and favors mutual funds. Collins looks at various investment custodians, considers the various mutual funds they offer along with associated costs and fees and then helps the client select a financial product.

While many clients exceed the income threshold for IRA deductions, this isn't the case with HSAs. Collins doesn't expect people to abandon their IRAs but suggests that they consider HSAs as a tax-advantaged supplement. Once the insurance policy is established, individuals can contribute up to 100 percent of their insurance deductible per year and write all of it off on their taxes.

For Collins, a fee-only advisor, this service isn't a real moneymaker. “It's part of a comprehensive look at their finances, not only on the asset side of the balance sheet but the liabilities and risks, too, and it helps cement the client relationship,” says Collins. “Ultimately, we are in the business to help clients grow and accumulate wealth and protect it, so anything we can do to accomplish that is obviously something we want to do.”

HSA Deposits: $8 Billion and Growing

HSA deposit totals are estimated to reach $8 billion this year and may go as high as $17 billion in 2009. The growth trajectory is comparable to — if not outpacing — that of the IRA, 401(k) or 529 plans in their early years, says Eric Remjeske, president of Devenir, which manages about $100 million in HSA investments, and also offers wealth management services to numerous small-business owners. Mutual fund options currently account for roughly 5 percent of total HSA deposits. However, studies show that HSA contributions are exceeding deductions by a large amount and are expected to more than double in the next two years from $1,500 to $3,500.

As investors continue making deposits and accounts grow, many experts believe educated investors will begin to view HSAs less as a health care product and more as a retirement savings vehicle. With proper planning, these accounts could become real assets for both the business owner and advisor or broker. Even if people deduct some of these funds, billions of dollars of assets will need to be managed.

Escalating health care costs can easily cut into the expense side of any small-business owner's ledger, and lack of adequate coverage can be a potentially huge liability, says Remjeske. “Health care and HSAs need to be part of the overall investment strategy and ongoing client discussions.”

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