A new option for controlling healthcare costs


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Issue 4 - March 2004

Finance & Taxes by Mark Battersby
A new option for controlling healthcare costs

You have a new option in healthcare coverage — whether you are looking for healthcare insurance for yourself and your family or seeking affordable healthcare options for your employees. The Medicare Prescription Drug Improvement and Modernization Act of 2003, signed into law in December 2003, created a provision for a unique tax-favored savings device. The new law permits eligible individuals to establish “Health Savings Accounts” (HSAs).

The question of affordable healthcare insurance has been a troubling one for many small-business owners, including chiropractors. HSAs may be the answer.

The self-employed option
Even before the Medicare law was signed, existing tax law permitted self-employed chiropractors to deduct amounts paid for health insurance premiums. For 2003 and thereafter, if you are self-employed, you may deduct from your gross income, 100 percent of amounts paid during the year for health insurance for yourself, your spouse and your dependents.

The deduction is limited to the your net earned income derived from the chiropractic practice for which the insurance plan was established, minus the deduction for 50 percent of the self-employment tax and/or the deduction for contributions to a Keough, self-employed SEP or SIMPLE plan.

Amounts eligible for the deduction do not include amounts paid during any month, or part of a month, that you were eligible to participate in a subsidized health plan maintained by an employer or your spouse’s employer.

Think IRA (Individual Retirement Account). If you make contributions to your employee’s IRA, the contributions are tax deductible for you and don’t increase the tax bill of the employee. And when the employee makes those contributions directly, they may be excluded from income. In every case, the income from the funds in those accounts remains in the IRA without impacting on the tax bill of the individual. HSAs work in a similar way.

According to many experts, HSAs will flourish as both individuals and their employers learn more about them and the many benefits they offer. In fact, those same experts expect Congress to make HSAs compatible with traditional flexible savings accounts (FSAs) and health reimbursement arrangements (HRAs) before the end of 2004.

The nitty-gritty

Here is a summary of how an HSA works:

• Eligibility. Under the new rules, an eligible individual is any person who is covered under a high-deductible health plan (HDHP). The individual cannot also be covered by any other health plan that is not HDHP, nor can they be entitled to benefits from Medicare.

• High deductible health plan. A high deductible health plan (HDHP) requires high deductibles and out-of-pocket expenses. Specifically, for self-only coverage, an HDHP must have an annual deductible of at least $1,000 and annual out-of-pocket expenses required to be paid (deductibles, co-payments and other amounts but not premiums) not to exceed $5,000.

• Contributions. Either you or your employee (or both) may contribute to an employer-established HSA. For an HSA established by a self-employed chiropractor (or unemployed individual), only the individual may contribute to the HSA. And, naturally, contributions have limits.

• Contribution limits. The maximum annual contribution to an HSA is the total amount of the limits determined for each month, based on status, eligibility and health plan coverage as of the first day of the month.

For calendar year 2004, the maximum monthly contribution for eligible individuals (under age 50) with self-only coverage under an HDHP is 1/12th of whichever is less — the full amount of the deductible (at least $1,000) under the HDHP or $2,600.

For eligible individuals with family coverage under an HDHP, the maximum monthly contribution is 1/12th of the lesser of 100 percent of the annual deductible under the HDHP (minimum $2,000) but not more than $5,150.

For example: Consider John Smith (age 48), a chiropractor who begins self-only coverage under an HDHP on June 1, 2004 and continues to be covered for the rest of the year. The amount of the deductible on his HDHP plan is $5,000. Thus, the contribution allowed is the lesser of the annual deductible or $2,600. The monthly contribution limit is $216.67 ($2,600 divided by 12). His annual contribution limit is $1,516.69 (7 months x $216.67.

Age is a factor in determining the amount of contributions that can be made. Individuals who are age 55 or more can, this year, contribute an additional $500 to an HSA prorated for the number of months they participate for the year. The amount of “extra” contribution for people over age 55 will increase each year for several years.

An HSA in
everyone’s pocket

Anyone with an HDHP may set up an HSA after January 1, 2004. Employers who have undertaken regular medical plan elections for 2004 may terminate that traditional health plan at any time and start offering the combination HSA/high-deductible health plan immediately in 2004. If an existing plan makes a promise to provide a certain benefit for a period of time, you must, of course, honor that commitment before switching.

HSAs provide another option in the arsenal of weapons available to everyone fighting the high costs of healthcare protection. Its flexibility permits you to benefit while, if desired, contributing funds to the HSAs of the employees of the chiropractic practice — with the accompanying tax breaks, of course.

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal or accounting advice. Please consult you professional adviser for any issue related to your practice.

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