If you're the owner of a small business, you know what it
feels like to get hit with big increases in health insurance
premiums. As one of the owners of a remodeling company, I am
interested in any insurance option that promises to curb this
When our current insurance policy expires, we plan to switch to
a health savings account (HSA) because it promises to reduce
what we're spending on medical care. It also offers some
attractive tax advantages.
HSA family plan
HSA family plan
HSA family plan
HSA deposit (assume maximum
Assumed yearly cost for deductible and
Less HSA account balance at end of
Less tax savings for HSA deposit (assume
25% tax rate x $5,250)
* this amount is paid from the HSA and is
the one big "if" in the calculation
** paid from HSA
***$5,250 from HSA, $1,750 out-of-pocket
This table compares the cost of the
author's current plan with the cost of an HSA. In the example,
there is some risk to the participants because the HSA policy
deductible is very high. However, the risk is offset by lower
premiums, tax savings, and the possibility that the
participants won't spend the entire deductible or deplete the
savings portion of the account every year.
What Is an HSA?
Health savings accounts were part of the Medicare bill that
was signed into law in late 2003 and took effect on January 1,
2004. HSAs combine a high-deductible health insurance policy
with a savings account that is used to pay medical expenses.
Certain rules apply — for example, participants cannot
also be covered by another health insurance policy while they
have an HSA. And by law, the deductible on the policy must be
at least $1,000 for an individual and $2,000 for a
high-deductible policy protects against a major illness or
prolonged hospitalization. It's not designed to cover all
medical expenses, which is why there is a savings component to
the plan. Unreimbursed medical expenses, including the
deductible, can be paid for out of the savings account. If the
participant has enough medical expenses to reach the
deductible, the health policy kicks in and begins paying for
Participants and their employers are allowed to contribute
pre-tax dollars to the savings account. Since the premiums for
high-deductible policies are lower than those for traditional
policies, the idea is to take what you save on premiums and put
it into the savings account. The participant can withdraw money
from the account and spend it, tax-free, on qualified medical
expenses. The list of qualified expenses contains many items
that traditional health care plans will not pay for.
Contributions are not limited to what the employer and
employee save on premiums — either one can put away more.
Participants and their employers are allowed to contribute up
to 100 percent of the annual deductible, within certain limits.
For 2005, the maximum allowable contribution is $2,650 for
someone with single coverage and $5,250 for someone with family
The money in the account is typically invested in mutual funds
and allowed to grow, tax-free. Funds left over at the end of
the year carry over to the following year. The participant owns
this money and can take it with him if he leaves or changes
jobs, much like an IRA or 401(k).
Excess funds. If the
deductible is high enough and the participant is healthy enough
not to need many medical services, a substantial balance could
build up over time. Funds can be withdrawn for nonmedical
expenses, but the participant has to pay income taxes on them
plus a tax penalty. At age 65 or upon disability, however,
funds can be spent on nonmedical expenses without a tax
penalty; normal income taxes will still apply.
Because the participant owns what's in his HSA and can use the
excess for future medical expenses or retirement, there is an
incentive not to spend these funds unnecessarily — an
incentive that does not exist when something is completely
covered by insurance or when money goes into a flexible
spending account that expires at the end of the year.
HSAs give control over health care dollars to the consumer.
Medical expenses not normally covered under most policies, like
acupuncture and eyeglasses, may be paid for through the savings
account. Participants may withdraw money at any time to cover
medical expenses or health insurance premiums simply by writing
a check from their savings-fund checkbook.
Availability. Because HSAs
are relatively new, some insurance companies do not yet offer
them or may offer them only in some states. Another
disadvantage of HSAs is that medical questionnaires must be
completed and many insurance companies do not want to cover
people who are older or who have pre-existing medical
conditions. This means some people will have a hard time
getting the necessary high-deductible insurance policy, or will
have to pay a lot for it.
Our company currently has a comprehensive managed-care plan
that covers the owners under a family plan and one employee as
a single. (Our other employee is covered by his spouse's
policy.) With our current plan, there is no deductible for
in-network services, but the premiums are high and getting
higher every year.
If we switch to an HSA plan with high-deductible policies, the
premiums will drop significantly. Right now our family plan
costs $8,880 per year and the single plan for our employee
costs $3,516 per year. If we're willing to switch to
high-deductible plans, we could get family coverage for $5,268
per year and single coverage for $2,224.
Of course, the reduction in premiums is not pure savings,
because the coverage we're looking at has a $7,000 deductible
on the family plan and a $3,500 deductible on the single plan.
We could opt for lower deductibles, but that would mean paying
higher premiums. The table on page 57 shows what the one-year
costs would be for our family coverage based on certain
assumptions regarding how much we put into the savings account,
how far we spend into the deductible, and what our marginal tax
rate would be.
The HSA plan looks good for us as owners because we're already
footing the entire bill for our coverage. If we can keep from
using all of the money we contribute to the savings account, a
balance will build up over time, which could come in handy in
future years if we start spending all the way up to the
deductible. If we're lucky enough not to have many medical
bills, the balance will be a nest egg for our retirement.
The situation will be different for our employee. We're
currently picking up 75 percent of the cost of his policy and
will continue to do so when he has a high-deductible policy.
However, someone has to fund his savings account and we're not
sure we can do that in a significant way. The employee will be
free to fund it, but past a certain point that will mean
spending more for his own medical care. Ideally, there would be
a way to avoid this, but the fact is we have to compete with
companies that offer employees no medical coverage at
all.Judy Villellais a partner in Villella Remodeling, LLC,
in Monongahela, Pa., and has worked in the insurance industry
for 15 years.
Handyman's Choice: Generalization or
"When you narrow the focus, everything — from bidding
to tool maintenance — becomes simpler, making business
more efficient and earning you more money."
Since many contractors won't even consider doing handyman work,
offering this service means you're already setting yourself
apart from the herd. But even though there's likely to be less
competition for the smaller projects, you're still going to
have to stand out to keep that phone ringing. To illustrate
what I mean, let's start with lunch.
Here in Southern California, we've got a couple of burger
chains — one is the same multinational brand that's in
your neighborhood, and the other's a regional brand with only
40 or so stores. The big chain has a large menu and lots of
choices, while the local guys sell just burgers, fries, and
shakes. While these burger joints obviously aren't selling
construction services, they do demonstrate the two business
models from which you'll choose: generalization and
Starting Out With
If you've got broad construction experience, a large assortment
of tools, and a lot of patience, taking the general approach
will allow you to field more leads — which makes sense
when you're starting out and hungry for work. Some prospects
like the convenience of "one-stop shopping," while others
appreciate the security of having one contractor handle all
phases of a project. Promoting yourself as an all-around
handyman gives you a sales edge with both types of
The downside of offering a large menu of services is that it
ramps up the logistical difficulties involved in your new
business. Each trade requires its own tools and materials, all
of which have to be acquired and transported to the job. Your
rig has to be big enough to serve as a mobile warehouse, or
you'll find yourself making multiple trips from your shop or
supplier to the job; either way, your overhead increases. So
does the cost of maintaining those tools and restocking your
inventory. In addition, the variables added by each extra
service you offer increase your chances of making a costly
Play to Your Strengths
If you decide to take this "big menu" approach, you'll want to
reduce the chances of making those errors to a minimum. Start
by analyzing your strengths and creating a written list of
marketable skills. At the top, write down the things you're
good at and enjoy doing, followed by the things you can do but
don't enjoy. It's all right to list marginal skills that you
enjoy working at and are willing to improve, but leave off
anything you can't enjoy on some level. You should be able to
commit to doing everything on your list in a good and
You will use the resulting list to coordinate your shop, your
rig, and your marketing and sales. For example, if your menu
contains a variety of services like carpentry and wallcovering,
what are the most common tasks you're likely to encounter in
those trades? Do you have the tools and materials needed to
perform daily what you've listed, or should you add to your
inventory? Are your skills up to par, or do they need brushing
up in some areas?
After completing the first list, you'll need a similar one
analyzing your target client. Is this "ideal" client going to
be commercial or residential? High-end or mid-range? Will you
deal directly with the end user of your services, or will you
be soliciting work from third parties — insurance
adjusters, property managers, real estate agents, and so on?
Bear in mind that third parties may require 30-day billing, so
be prepared to float their invoices. Also, decide how far
you'll travel to serve this ideal client, and what hours you'll
be available (weekends or on-call repair service could be a big
plus to your target market).
Moving Toward Specialization
Even though the second list isn't as complicated as the first,
it gives some insight into why I favor specializing a handyman
business. When you narrow the focus, everything — from
bidding to tool maintenance — becomes simpler, making
business more efficient and earning you more money. Eventually,
you'll trim your workload anyway, picking the jobs you like
best. You might as well start planning for that outcome.
At the same time that you, as a startup business, are grabbing
all the handyman work that comes your way, you should be
letting clients know that you "specialize" in the work you
prefer. List that trade at the top of your cards, truck sign,
and other advertising. The idea is to attract clients who need
your preferred skill without discouraging others from calling
for your secondary skills. By gradually moving toward
specialization, you'll be able to establish yourself in a
profitable niche market while weeding out the unwanted work
from your schedule.
And what about those calls for work you don't like? You'll be
farming those jobs out, to other contractors who do like that
kind of work. No, not because you're such a nice guy, but
because you've previously made deals with noncompeting
contractors to swap unwanted leads.
Leland Stoneoperates a handyman business in La