Health Savings Accounts for Small Groups

Individual HSAs for Small Employers

Our notion of an ideal small employer health insurance program looks like this:

Employees purchase their own high-deductible plans

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

Advantages to the employer include:

They remove themselves from the business of group health insurance and associated negatives, such as administrative responsibilities, annual rate increases, employee claim issues, insurance company underwriting obstacles and the 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:

Their health insurance isn't tied to their employment. They can leave their job without worry of losing coverage.
They 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 group health insurance. Employers and employees can share the cost savings.

The primary disadvantage is that some employees and family members may have health conditions that prevent them from qualifying for personal health insurance. Correspondingly, the employer can't guarantee health insurance to potential new employees. However, both Illinois and Indiana provide subsidized safety net health insurance plans for persons in such circumstances.

The 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, the employer funding can take another form, such as increased taxable wages.

Correspondingly, the employee has an extra monetary incentive to purchase HSA-compatible health insurance, because tax-exempt employer HSA contributions are preferable (at least to those of us with traditional financial principles) 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 insurance company rate increases.
The employer is providing the employee a tangible financial asset, not an overly generous health insurance policy that the employee may not need.
Employees may view the HSA contribution as more fair -- not varying in value based on an employee's age or sex (factors that may 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 their job. If they terminate employment, they keep 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. 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 professional (We know where you can find one.).

In addition, employee insurance payments can be facilitated by payroll deduction, though we don't recommend it, as we think it's a good thing for employees to be responsible for payment of their own health insurance premiums.

Is such an Arrangement Practical?

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.

The current system of small group employer-sponsored health insurance is increasingly troubled. We see the evidence every day with so many small employer group health insurance plans on the verge of collapse.

As group coverage becomes increasingly unaffordable, healthy employees drop out of the group plan and obtain their own private coverage. This accelerates group rate increases, and the situation continues to deteriorate. We call it the "small group health insurance death spiral."

We observe lots of small employers with group health plan participation below their insurance company's underwriting guidelines. They're one insurance company audit away from termination of the group policy. In our view, most of these employers need to "trash" their group health insurance plans and go in a new direction.

Individual HSAs for Your Business?

Will the individual HSA approach work for your business? It depends a lot on the culture of your organization. If you're a committed paternalistic employer, this arrangement may be too harsh. And, of course, we understand that in some industries businesses simply must offer generous employer-sponsored benefits to attract the type of skilled employees they need.

On the other hand, if you're ready to jettison the health insurance employee entitlement and promote mature self-reliance, individual HSAs may be your best alternative.

If the federal government makes individual health insurance premiums tax-deductible (a not-unlikely component of any pro-free market comprehensive national health insurance legislation), the individual HSA approach to small employer health care insurance is going to really "take off" -- at least that's our confident prediction.

	Individual & Family Health Insurance
	Small Business Health Insurance