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April 2006
by James C. Musser, ASBA Washington Representative

April has been a slow legislative month with Congress on hiatus for two weeks so that the Senators and Representatives can spend time in their districts hearing from constituents before completing work on the Fiscal 2007 Budget Resolution. When the Members return next week, their plates will be full with the budget, border control and tax legislation awaiting action. As always, ASBA will closely monitor all of these developments and report on any issues that might have an impact on small businesses and the people who run them.

With Congress out of town and tax season just coming to a close with the April 17 filing deadline, ASBA has been looking at recent changes in federal law that might be of interest to small business owners. Small business people who have not yet taken advantage of Health Savings Accounts (HSAs) for themselves and their employees should consider this valuable health care option and its tax benefits. HSAs were created by the 2003 Medicare Reform Act and they are tax free savings account that can be used to pay for medical expenses for individuals, their spouses and dependents.

Under the terms of the law, individuals, their employers or both may contribute funds on an annual basis to the HSA. Contributions, interest and investment earnings on the accounts are tax free as are withdrawals for qualified medical expenses. The government has estimated that HSA owners can save as much as forty percent on their out-of-pocket medical expenses.

In addition to the tax benefits of owning an HSA, these accounts offer both choice and portability. The account belongs to the individual participant who has complete control over which doctors he sees, what health services he receives and when he receives them. Funds from the HSA can be used to cover routine medical expenses such as doctor visits, prescription drugs and even over-the-counter drugs. Because the account belongs to the participant, a worker does not have to depend on a particular employer in order to use the benefits of the HSA. Just like an Individual Retirement Account (IRA) the HSA is the property of the individual and if the individual employee goes to another job the HSA goes along with him.

In order to take advantage of an HSA account, the worker or his employer must first purchase a high-deductible insurance policy to cover major medical expenses such as surgery, hospital stays or other large expenses. Because these policies are high-deductible plans, the premiums for them are much lower than conventional health insurance. Once that coverage for major medical expenses has been obtained, workers can begin contributing to an HSA. The law permits annual contributions for individuals of as much as $2,600 or up to $5,150 for a family. Those contribution amounts are adjusted annually to account for inflation so that the benefit is not diminished over time by inflation in the economy.

Individuals interested in establishing a Health Savings Account should speak with their accountant, the human resources professional at their place of employment or contact their local SBA office for further information.

James C. Musser, Esq. is a legislative consultant based in Falls Church, Virginia. His reports are updated monthly.