HSA Arrangements for Small Employers

Individual HSAs for Small Groups

Our idealized notion of an optimally cost effective small employer health insurance program looks like this:

Employees Purchase their own Insurance

Each employee is responsible to purchase his or her own high-deductible HSA-compatible health insurance. Employees may receive some subsidy from the employer via additional wages or some other form of compensation or reimbursement.

Advantages to the employer include:

Employers remove themselves from the business of group health insurance with it's associated administrative responsibilities, rate increases, employee claim issues, insurance company underwriting obstacles and the occasional hassle of switching insurance companies.
Employees are no longer shielded from the true cost of health insurance.
A more mature culture of individual responsibility is encouraged.

Advantages to the employee include:

Health insurance isn't tied to employment. Employees can leave their job without worry of losing coverage.
Each employee can choose plans and insurance companies that best fit their needs and circumstances. No more "one size fits all" health insurance.

Advantages to both the employer and employees include:

Personal health insurance (especially high-deductible HSA-compatible coverage) almost always costs much less than does traditional group health insurance. Employers and employees can share the cost savings.

The primary disadvantage of such an arrangement is that some employees and family members may have health conditions preventing them from obtaining personal health insurance in the private market. However, both Illinois and Indiana provide subsidized safety net health insurance plans for persons in such circumstances.

• Employer Provides Some HSA Funding

For employees who've purchased HSA-compatible health insurance, the employer makes contributions into a Health Savings Account (HSA) owned by the employee. For employees who choose not to have HSA-compatible health insurance, employer funding can take another form, such as increased taxable wages.

Correspondingly, the employee has a financial incentive to purchase HSA-compatible health insurance, because tax-exempt employer HSA contributions are preferable to the same amount in taxable wages.

Advantages to the employer include:

HSA contributions are a deductible health and welfare expense.
HSA contributions aren't subject to group health insurance rate increases.
The employer is providing the employee a tangible financial asset, as opposed to enrollment in a group health insurance plan at a cost largely hidden to the employee.
Employees may view the HSA contribution as more fair, not varying in value based on an employee's age or sex (factors that often determine the small group health insurance rate paid for each employee).

Advantages to the employee include:

They own the HSA and they can manage it however they please (subject to IRS guidelines).
The HSA isn't tied to the job. If the employee terminates employment, he or she keeps the HSA.
Employees can reduce their taxable income by making their own contributions to their HSA.
Employees can use the HSA for tax-advantaged funding of expenses not covered by health insurance, such as dental exams, orthodontia and vision care. As such, the HSA provides an expansion of benefits.

• Assistance to the Employee

If an employee needs assistance in purchasing health insurance, the employer can refer them to a trusted health insurance broker who markets individual products.

In addition, employee health insurance payments can be facilitated by payroll deduction. Health insurance companies can administratively combine individual health insurance policies onto a single list bill.

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Will it Work for You?

As a practical matter, this sort of arrangement isn't going to work for large companies. However, for many employers with 20 or fewer employees, the individual HSA approach has demonstrated effectiveness.

If your small company has experienced group health insurance plan deterioration, such as declining participation and skyrocketing insurance premiums, you should consider this type of arrangement.

If you're a small company that hasn't previously offered health insurance to employees, we suggest you contemplate this individual HSA approach as an alternative to traditional group health insurance.

	Individual & Family Health Insurance
	Small Business Health Insurance