You read it right. You are on the right blog. This is still the Multnomah Group blog, and we still work with retirement plans. What you may not know is that a conversation about health – specifically, health savings accounts – is now making its way into the retirement savings conversation. But why? Health savings accounts afford an opportunity to do more than pay for this year’s health expenses. Health savings accounts (HSAs) provide significant tax advantages and allow for retirement savings.
What is an HSA?
HSAs, not to be confused with Flex Spending Accounts (FSAs), were introduced in 2003. HSAs are an IRA-type of account that allows individuals with a high deductible health plan to contribute to an account to be used for qualified medical expenses.
The unique features of an HSA include (but are not limited to):
- Eligibility is dependent upon having a high deductible health plan.[1]
- The funds contributed to the HSA do not have to be used in the same year they are contributed; the funds rollover year after year, meaning an individual can fund his/her cost of healthcare in retirement by saving today.
- HSAs can receive contributions from individual employees or from employers (or both).
- HSAs have a triple tax advantage! First, contributions by employees are excludable from an employee’s income and are not subject to federal income tax or employment tax withholding. Second, HSAs accumulate on a tax-free basis, and finally, there is no tax on the distribution from the HSA so long as it is used for a qualified medical expense.
- HSAs are individual accounts and move with the individual; in other words, they are portable.[2]
Why does this matter for plan sponsors?
Plan sponsors may take note of HSAs for a few reasons. First, HSAs are on the rise. A recent study by Morningstar predicts that from 2016 to 2018, the assets in HSAs will increase by 40%.[3] Studies show that employers often favor high deductible health plans, which are less expensive for employers, and give employees some “skin in the game.”[4] As the study explains, if employees have a high deductible, they will take better care of themselves and seek out preventative care, likely avoiding discretionary or unnecessary care.
Second, the legislative landscape – though a moving target – is something to watch. While it remains to be seen what will come of the American Health Care Act (or similar legislation), there are efforts on Capitol Hill to increase (potentially double) the limits for HSAs. Further, the Cadillac Tax, which has a delayed implementation to 2020, would also make high deductible health plans more favorable, and hence create an increasing opportunity for HSAs.
Third, as mentioned above, employers can contribute to HSAs, coupled with the fact that HSAs are a retirement savings vehicle. This makes HSAs part of both a retirement savings discussion and a total benefits discussion. Recall, HSAs do not have to be spent within the same year contributions are made to the HSA. As the cost of healthcare continues to rise, HSAs can become part of a comprehensive retirement planning strategy for many individuals, making this potentially an attractive benefit for employees.
HSAs are on the rise and primarily in the large plan market. If you are interested in continuing the conversation about HSAs and learning more about how HSAs fit into your total benefits plan including your retirement strategy, contact a Multnomah Group Consultant.
Notes:
[1] Note that other conditions apply; for example, individuals cannot be entitled to Medicare and cannot be a dependent. These issues are beyond the scope of this post.
[2] This blog post provides a high-level overview of the features of an HSA, but is not comprehensive on this particular subject matter.
[3] See Morningstar, 2017 Health Savings Account Landscape, citing Devenir Research 2016 Year-End HSA Market Statistics & Trends.
[4] See Morningstar, 2017 Health Savings Account Landscape.
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Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.