Savvy advisors are always on the hunt for additional ways to build their businesses while also increasing the value they deliver to clients. To that end, Health Savings Accounts (HSAs) can benefit employers, employees and advisors alike.
Health Savings Accounts provide employers with a cost-efficient means to manage rising healthcare costs, while also helping employees to afford future medical expenses and protect their retirement savings. For advisors, Health Savings Accounts represent an opportunity to provide additional client support and possibly a new pool of assets to manage in concert with 401(k) portfolios.
The Rising Prevalence of HSAs
Health Savings Accounts have been gaining momentum since they were first introduced in 2003, and given the uncertain future of the Affordable Care Act, they are likely to continue to grow. According to the National Conference of State Legislatures, in 2015 enrollment in Health Savings Accounts plans climbed 13% to almost 20 million, raising the total amount of assets to over $28 billion. Furthermore, based upon 2016 mid-year research conducted by the Devenir, by the end of 2018 the HSA market will exceed $50 billion in assets held among over 27 million accounts.
The Treasury Department established the Health Savings Account to enable people who are covered by a qualified High Deductible Health Plan (HDHP) to pay for healthcare expenses with tax-free dollars. In fact, there is a triple tax advantage—contributions can be made pre-tax or tax-deductible, investment earnings are tax-deferred and funds withdrawn to pay for qualified medical expenses are tax-exempt.
Today, more and more employers are encouraging employees to choose an HDHP coupled with an HSA in order to reduce premium costs and redirect those funds to either pay for current medical expenses, save for future healthcare costs or augment retirement savings.
In 2016, for a health plan to qualify as an HDHP it must have a deductible of at least $1,300 for self-only coverage or $2,600 for family coverage, among other IRS restrictions.
The Role of 401(k) Advisors
401(k) advisors are often brought into the HSA discussion when plan sponsors or plan participants seek guidance in terms of how much relative funding to direct toward the HSA versus the 401(k)—a very valid and relevant issue for advisors to address.
Any retirement readiness assessment is incomplete if it fails to recognize that one of the greatest expenses during retirement will likely be medical costs. According to Fidelity’s 2016 Retiree Healthcare Cost Estimate, a couple retiring this year should be prepared to pay an estimated $260,000 in healthcare expenses throughout retirement. So, the subject of coordinating HSA and 401(k) savings should be something advisors are prepared to discuss.
That conversation might flow something along the lines of the following: For tax-year 2016, when combining a 401(k) and an HSA, a 55-year old individual with family medical coverage would be able to save up to $31,750 per year—$7,750 contributed to the HSA ($6,750 plus $1,000 catch-up contribution for those over age 55) plus $24,000 contributed to the 401(k) ($18,000 plus $6,000 catch-up contribution for those over age 50). For those under age 50 with self-only medical coverage, they could save up to $21,350 per year—$3,350 contributed to the HSA and $18,000 contributed to the 401(k).
Conversations with Plan Sponsors
Unless you have specific experience and credentials, you’d clearly not pass yourself off as an HSA expert. HSAs must adhere to complex IRS restrictions—particularly given their exemption from federal income taxes, Social Security/Medicare taxes, and most state income taxes. But there are several key points that advisors can safely raise with their plan sponsors.
If the sponsor doesn’t offer an HDHP coupled with an HSA, it’s something they may want to consider—usually as part of a Section 125 Plan (cafeteria plan). Not only can they save on healthcare premium costs, but also employer contributions, if they choose to make them, are generally tax deductible for the employer and excludible from the employee’s gross income.
If they already offer an HSA, are they satisfied with the range of investment options offered by their HSA administrator? If the plan sponsor is pleased with your performance as a 401(k) advisor, they may be willing to include your firm as an option for plan participants to manage their HSA along with their 401(k).
Another issue to discuss with plan sponsors is whether they are satisfied with plan participation rates and the educational support of their HSA administrator. 401(k) advisors who already provide an educational support program should be able to add a discussion of HSAs to their presentations and discussions. And the good news is that in most cases employees may increase their HSA deferral amount at any time during the year—not only during open enrollment time frames.
Conversations with Plan Participants
When speaking with plan participants, the focus should be on education and decision-making support to help them maximize the benefits of both their HSA and 401(k). This can be achieved through group forums as well individual employee planning sessions.
One of the great benefits of HSAs is their portability. Because the accounts are individually owned, account holders can direct who manages their HSA assets at any time. And this holds true whether the employee remains with their employer or resigns or changes insurance carriers. So you can emphasize the benefit of having one advisor manage both their 401(k) and HSA to ensure optimal portfolio diversification.
Another major point to emphasize to employees is the tremendous flexibility to make decisions about their own healthcare and finances. They can use their HSA funds in one of three ways:
- For current medical expenses
- For future healthcare expenses
- As a secondary retirement savings vehicle—after age 65 the account holder can use the funds for any non-medical expense they would like by simply paying the deferred income tax at that time, much like an IRA.
In addition, unlike a flexible spending account, there is no “use it or lose it” provision—funds in the HSA can be used at any point in the future or remain invested for continued growth.
As an advisor, you should always be looking for ways to solidify your plan sponsor and individual client relationships including value added services. The far-reaching benefit of coordinating HSA and 401(k) plans provides just such an opportunity.
About Jim Betzig
Jim Betzig is a Partner and CEO of Beirne Wealth Consulting, an SEC Registered Investment Advisor with about $2 billion in assets under management. Betzig’s firm offers a service for advisors to outsource their retirement plans and institutional business if they do not want to do it themselves. He is also a co-author of the book “The Rest Easy Retirement Plan.”
Betzig specializes in working with both institutional and individual clients, assisting in financial planning, asset allocation, tax-free investing, manager searches and selection, and liability management. Check out BeirneWealth.com for more information.