health savings account? flexible spending account? cafeteria plan?

Question

we have: 2 employees, 2 co-owners.
health insurance is provided as is a 401k.

what is the best plan to institute to get the tax savings to pay for medical copays, etc.

and please explain how they work.

Answer 1

The earlier answerer did a good job of explaining, but here’s my two cents since I already typed up an answer (also included some info on Health Reimbursement Accounts and there’s some more links below)…

1.Health Savings Account
a.Employer AND employees can contribute
b.Triple tax-free: contributions are made pre-taxes, interest is not taxed, and withdrawals are not taxed if the money is used for a qualifying medical expense.
c.Contributions are limited based on health plan and federal law.
d.Balances carry over to the next year.
e.Employee can take account if she/he leaves job.
2.Flexible Spending Account
a.Employer OR employee can contribute.
b.Double tax-free: Contributions and withdrawals are tax-free.
c.No limit to contributions.
d.Balance does not rollover at end of year.
e.Account forfeited when changing jobs.
3.Health Reimbursement Account
a.Employer makes contributions
b.Kind of double tax-free: contributions are not taxed (for the employee) and withdrawals are not taxed
c.No limits to amounts
d.Balances rollover
e.Money returned to employer if employee changes jobs
4.Cafeteria Plan – not similar to the accounts listed above. This is more of an approach to packaging benefits in which you give employees a list of possible benefits and they select the ones they want.

HSAs, FSAs, and HRAs are pretty simple to get started. It’s not much more difficult that opening up a bank account (since that’s what they basically are). One restriction with HSAs is that they can only occur in combination with a type of health plan that has a high deductible and a low premium payment. As another answerer mentioned, you might want to look into trade associations and small business groups that offer health plans. Also, you might call your state insurance department and see if there are any type of purchasing pools that you can take advantage of. The links I’ve included below are for the National Associated of the Self-Employed, which has a good health insurance resource page; MostChoice.com – a Web site that specializes in putting people in touch with state-licensed agents. You fill out a form and within 48 hours agents begin competing for your business; state insurance department information; a fact sheet on health savings accounts.

Good luck. I hope this helps
Barnes@MostChoice

Answer 2

Your best bet is to talk to an insurance company to find out what's available in the market. But generally speaking, a health savings account/flexible spending account allows employees to deposit money (before taxes are paid on it) into an account and then pay medical expenses out of the account -- with pre-taxed money. If you know you'll have a lot of medical expenses, it's a good way to go. However, there is a use-it-or-lose component to these plans. You have a short time after the end of the company fiscal year to use up the money in the account, otherwise it gets forfeited and you lose it.

A cafeteria plan is one in which employees are given a certain amount of money and then they choose where to spend it. They can use it to buy life insurance, health insurance, dental insurance, vision insurance, disability insurance or whatever is offered. If what they choose is more expensive that what they are allocated, the employees pay the extra.

With the size of your firm, you are not going to have many low cost choices, so you should check out similar small businesses to see if you can pool your groups to get better group rates.