The recent tax reform fight included quite a bit of angst for 401k advisors and the retirement plan industry as a whole. The specter of contribution cuts down to $2,400, floated last fall in pre-negotiation maneuvering, provoked enough of an outcry (and Democrat advantage) that its Republican backers quickly walked away.
Most agreed that if it had happened, health savings accounts—already enjoying a surge of consumer and advisor interest—would step even further into the spotlight.
But what happens now? With “Rothification” off the table and tax cuts now law, do HSAs enjoy the same prominence? What’s the case for HSAs overall and why do they make so much sense?
We asked Paul Fronstin with the Employee Benefit Research Institute for insight, which he was glad to give.
As director of the Health Research and Education Program at EBRI, Dr. Fronstin’s research includes trends in employment-based health benefits, workplace wellness programs, employee benefits and taxation, and public opinion about health benefits and health care, among others.
He currently serves on the board of trustees for Emeriti Retirement Health and the national advisory board for the University of Michigan Center for Value-Based Insurance Design. He is also a TIAA-CREF Institute Fellow.
Q: From a policy standpoint and in the wake of tax reform, do HSAs still have the same appeal?
A: We still need to look at HSAs as a potential retirement savings vehicle, because they still have better tax advantages than 401ks. So, there is still obviously interest there. I think the major result that came out of the tax reform was the delay of the Cadillac Tax again.
In a nutshell, the Cadillac tax is a tax on high-cost health plans. On the one hand, if the tax takes effect, HSA-eligible health plans would be an attractive way to avoid the Cadillac Tax, because the premiums are lower. However, with the way the Cadillac Tax was designed, it would count employer and employee contributions towards the cost of health insurance, so it didn’t make the HSA plan as attractive as it could be.
Now that the tax has been delayed, I think it gives employers a reason to look at HSA plans again. Not as a way to avoid the Cadillac Tax necessarily, but it takes the issue off the table for a while, and maybe permanently.
Q: So as with the fiduciary rule, the delays might mean death by a thousand cuts?
A: Exactly. The interesting thing to me is that I’ve been looking at enrollment trends in HSA plans lately, and it seems like the growth has stalled. Maybe the growth has stalled because of the Cadillac Tax with the way that it was written, and that it would include HSA contributions. Employers would look at that and say, “I’m not sure I want to go in this direction just yet,” but now you might see an uptick in enrollment.
So there are a number of different factors; the uncertainty has been resolved over the tax and there is not as much of a sense of urgency given that the premiums have not been increasing as much as in the past.
Q: Have you heard rumblings in Washington to increase the HSA contribution limits?
A: Yes, there have been rumblings about that for the better part of the year or longer. Last March, when Republicans released alternative language to repeal and replace the Affordable Care Act, their legislation would have doubled contribution limits. It never happened. Maybe it will come back around. Who knows?
The interest is there, but I don’t know that, if you want to grow the HSA market, it’s the way to do it. It would certainly help some people who have HSAs now, but I have a database of 5 million accounts. It contains at least 25 percent of the universe of HSAs. I find that only 13 percent of the accounts in my database max-out their contributions. They’re not contributing less than the maximum because the contribution limit is too low. If the limits were increased, only a small percentage of people are going to take advantage of that.
But people would be lined-up around the corner to enroll in an HSA if the plan was more flexible in terms of how health care services were covered. In an HSA plan, everything has to be covered subject to the deductible, with the exception of certain preventive services. For example, if you allow people with diabetes to go get their annual eye exam for free and had that carved out of the deductible, then I would argue that people with diabetes would be more interested in HSA plans.
Q: What, in your estimation, are advisors doing wrong and what should they be doing right?
A: That’s really simple. What they are doing wrong is not talking about HSAs. What they should be doing right is talking about HSAs. Maybe I’m wrong about that, but it certainly has that feel. There’s not a lot of information they provide when sending out descriptions of their services that include HSAs.
You’re going to have more people with these accounts showing up. Financial advisors have a select population of people with means. They’re looking to somehow pay for advice, and they’re the ones that maybe are most likely to be in a position to be able to max-out their contributions and not touch them. For a lot of people, they might have an HSA, but are just using it to reimburse themselves because they might have high deductibles.
But now is the time to do it, because it’s growing, and you want to get in early with your clients. You want to talk about HSAs before someone else is doing it, so you don’t lose them as clients.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
