The Ideal Plan for a Business Owner
Why we ask owners to enroll themselves in an HSA based plan first, and how to fund it so the benefit is still there twenty years from now.
Start with yourself
An HSA based plan suits a business owner particularly well. Owners often have the financial resources to fund the account fully, which is where the benefit compounds fastest. That is more true still with family coverage, which carries a higher contribution limit than individual coverage, and after age 55, when a catch up contribution becomes available to the owner and to a spouse who has an account of their own.
Employers who offer an HSA based plan and take the time to educate employees on how it works are providing a genuinely terrific long term benefit, not simply a policy.
Why the owner should go first
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Since 2004 Hopper Insurance Services has recommended that business owners enroll themselves in an HSA based plan unless there is a mitigating health concern.
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It gives you first hand experience of the plan before you ask anyone else to consider it. You will have used the debit card, seen an explanation of benefits, and watched a balance build.
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It makes the pitch to employees honest. You are not describing a plan you declined for yourself.
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Owners who took that advice and stayed in reasonably good health should now have a substantial pool of tax free cash set aside for health care in retirement.
How an owner gets the most out of it
The mechanics are simple. What separates a good outcome from an average one is funding the account steadily and leaving it alone.
Fund it to the limit you qualify for
The IRS sets the annual contribution limit, and it changes every year. Family coverage carries a higher limit than individual coverage, and account holders age 55 and older can add a catch up contribution.
We do not publish those figures here, because a stale number on a website is worse than no number at all. Call us and we will confirm the current limits for your situation.
Treat it as a long horizon account
Many custodians offer investment options inside the account. Fees vary a great deal between custodians, so compare them the way you would compare a retirement account.
Paying small current medical bills out of pocket, and letting the account keep growing, is the version of this that works best over ten and twenty years.
Keep the receipts
A qualified medical expense you pay for yourself today can be reimbursed from the account later, as long as it was incurred after the account was opened and you kept the record.
What qualifies is set by IRS rules and some items need a physician's involvement, so ask us before you spend rather than after.
Then take it to the group
Once you have run on the plan yourself, the conversation with employees changes. You can explain the account rather than sell it.
That is the point at which the strategy on the rest of these pages starts to hold together for the whole company.
A caution on the tax treatment
The tax advantage people describe as triple is a federal one. Contributions go in untaxed, earnings grow tax free inside the account, and withdrawals for qualified medical expenses come out tax free, all under federal law.
California has never conformed to the federal HSA rules. Contributions are not deductible on a California return, the account's earnings are taxable by the state, and employer contributions still count as taxable state wages. The federal advantage is still the larger number for most people, but talk to your tax preparer about the California side before you decide.
Two dates an owner needs on the calendar
Penalty free withdrawals for anything other than qualified medical expenses begin at age 65, not at retirement. Before 65, a withdrawal that is not for a qualified medical expense is taxed as income and carries an additional penalty on top. Retiring early is not the same thing as turning 65.
Enrolling in Medicare ends your ability to contribute, though you can keep spending what you have already saved. Part A can be backdated up to six months when you claim Social Security after 65, which can turn contributions you already made into excess contributions. Stop contributing early enough to stay clear of that, and call us before you file for Medicare.
Should you be on this plan yourself?
Send us your situation and we will tell you honestly whether an HSA based plan fits, including when it does not.