Compliance October 28, 2020

Health Savings Account Basics

One notable feature is that account holders can deduct from their own income the amount of HSA contributions made to their account by other people—but not the employer.

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The first day of the 2020 PLANSPONSOR HSA Conference featured a detailed panel discussion about the rules and regulations impacting the provision and operation of health savings accounts (HSAs).

Speakers on the digital panel included Katie Bjornstad Amin, a principal with Groom Law Group, and J. Kevin McKechnie, founder and executive director of the HSA Council at the American Bankers Association. The pair took time to dive into the heart of HSA regulations and did not shy away from the highly technical aspects of HSA management and optimization.

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Right off the bat, Amin dispelled the myth that HSAs are something new and have an unproven history, noting that the accounts were created as part of a broader legislation package back in 2003. Congress created the accounts so they could be used to accumulate money on a tax-preferred basis to pay for certain medical expenses. The accounts are distinguished from other health care benefit approaches by the fact that they belong to the individual and are carried over from year to year. Congress also established that the maximum contribution amounts would be indexed each year. For 2020, the limit is $3,550 for self-only coverage and $7,100 for a family, plus a possible $1,000 “catch-up” contribution for people age 55 and over.

As the accounts have evolved, and thanks to the strict regulations in place, HSAs primarily have been used as a complement to high-deductible health plans (HDHPs)—and they have been continuously hailed for their “triple tax advantage.” This is a short-hand phrase denoting how contributions go in tax-free, grow tax-free and can then be spent tax-free on qualified medical expenses.

As of 2020, the HDHP minimum deductible to trigger HSA eligibility is $1,400 for self-only coverage and $2,800 for family coverage, coupled with a maximum out-of-pocket limit of $6,900 for self-only coverage and $13,800 for family coverage.

The panel explained that individuals can make both pre-tax contributions through payroll deductions as well as after-tax contributions. They can also deduct from their income when filing tax returns. Another notable feature is that account holders can deduct from their own income the amount of HSA contributions made to their account by other people—but not the employer. Another favorable feature is that employer’s contributions are excluded from the employee’s income employment taxes.

Amin and McKechnie warned that over-contributions are more common than they might seem. Such contributions are defined under the law as “excess contributions,” and, technically, the account holder is responsible for remedying these. If the account holder doesn’t timely withdraw excess contributions and rectify his stated net income, a penalty of 6% of the excess contributions will be assessed on the account annually, until the issue is resolved.

When it comes to the tax-free spending phase of the HSA journey, the panel explained, most medical expenses defined under Internal Revenue Code (IRC) Section 213(d) will qualify. Thanks to recent changes in the regulations, a prescription is no longer required for over-the-counter medicines or drugs to be considered qualified. Distributions are permitted for the only following types of health insurance premiums:

  • If age 65 and over, Medicare Parts A and B, Medicare HMO [Health Maintenance Organization], and the employee share of premiums for employer-sponsored health coverage;
  • COBRA [Consolidated Omnibus Budget Reconciliation Act] coverage;
  • Qualified long-term care contracts; or
  • When receiving unemployment compensation under federal or state law.

The panel further noted that HSA funds can be used for other expenses, though different penalties and taxes will apply in certain circumstances. In basic terms, nonqualified withdrawals will be subject to normal income tax plus a 20% penalty. However, the penalty doesn’t apply if the account holder becomes disabled or turns 65.

In Practice October 27, 2020

A Financial Services Diversity Action Plan

Both responding to and reflecting the times, leaders at major financial services organizations are growing increasingly vocal about the importance of cognitive and cultural diversity on a team’s long-term performance.

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PLANADVISER has on various occasions reported the sobering statistics that demonstrate the financial services industry’s diversity and inclusion problem.

As of 2017, just 19% of advisers in the U.S. were women, data from the U.S. Bureau of Labor Statistics shows. And, considering the professional fields that intersect with the financial and retirement advisory space, the problem is thrown into sharper relief. Breaking down those numbers, 52% of accountants were women and 32% of attorneys were women. At the same time, even though African Americans made up about 13% of the United States population, the Bureau reported they accounted for only about 7.6% of financial services professionals.

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Sources have discussed the many historical and contemporary causes of this representational gap, and though there are differences of opinion about how to proceed, they have all recommended that firms and stakeholders make improving diversity a priority. Many recommend focused mentorship and outreach efforts, while others have emphasized the importance of creating compensation structures that make the job of being an adviser seem more attainable—especially during the early years of building a book of business. 

A new white paper published by Willis Towers Watson (WTW) adds to this important, ongoing discussion. Dubbed “Diversity in the Asset Management Industry,” the paper takes an unflinching look at this issue and, importantly, presents some practical recommendations for the firm and its peers to put into practice. The findings are based on the firm’s investment manager review process, which now takes into account “culture reviews” that consider the “impact of greater cognitive diversity on a team’s effectiveness.”

“In our view, an ideal asset manager has optimal cognitive diversity, where we define cognitive diversity as the inclusion of people who have different ways of thinking, different viewpoints and different skill sets in a team,” the paper says. “Cognitive diversity is hard to measure, but it is heavily influenced by quantitative metrics of diversity that we can collect. We therefore assess diversity across gender and ethnicity, and endeavor to assess the deeper and more nuanced aspects in our manager research process.”

As the WTW paper explains, the actual process of measuring these metrics will vary depending on the investment manager being considered, but there are some common points of analysis. For example, it is important to review a leadership team’s “differences in prior social, educational and working experiences.” It is also important, the paper explains, to recognize the depth of the issue, as less than 10% of investment management firms operating today can be said to be “diversely led.”

One important point raised in the paper is that purely quantitative screening for diversity and inclusion will remain challenging, so long as a minority of investment management firms openly discuss or disclosure their staffing information.

“Focusing on a single metric can also create limitations,” the paper says. “Take minority and female ownership as an example. At first glance, it seems to be a good metric, because it combines diversity with alignment, an important consideration in the sustainability of an asset manager’s competitive advantage. However, when we examine the data reported to a third-party database provider which comprises over 6,000 firms, only about a quarter of them provide ownership details, making screening by diverse ownership extremely limiting.”

The lesson is that there is no single avenue for sourcing or identifying diversely led firms or investment teams, the paper says. By the same token, it is difficult to definitively demonstrate, with a single metric or statistic, the relationship between an investment manager’s level of leadership/staff diversity and consistent outperformance. Of course, this does not mean a positive connection exists.

“Does diversity lead to better returns?” the paper asks. “At a minimum, diversity does not hurt returns. But, more than this, our assessment of diversity and performance outcomes shows that investment teams with diversity, in particular ethnic diversity, tend to generate better excess returns. Our research continues as we collect more data.”

Later sections of the WTW white paper pointedly address some of the ugly truths that underpin this entire discussion.

“Due to many biases against minorities in the industry, leading to fewer opportunities for many throughout their careers, there is an unbalanced talent pool [in the selection of firm leaders],” the paper suggests. “To address the systemic issue more holistically, we need to go beyond targeting what is currently a very small subset of minority and female-owned firms by also engaging with firms that are weak in diversity.”

The full paper includes a number of actionable recommendations directed at fellow asset managers and the investment consultant and advisory community. These include a push to shift decisionmaking structures away from “star models,” where only one person holds the final authority, in favor of truly team-based approaches that consciously attempt to introduce more diversity. It is also paramount to take a careful look at compensation procedures and policies on flexible working arrangements. 

The paper suggests collaborating with outside diversity networks that are engaged on culturally diverse college campuses, as well as those focused on helping career changers and people leaving the military. Looking internally, it is important to develop real tracking of diversity levels and a commitment to honest, clear communication practices about these issues. Another option is to consider forms of mentoring and reverse mentoring, or other types of sponsorship programs, that help to foster dialogue and communication across the levels and silos of an organization, with the interest of giving management a more meaningful understanding of the challenges and opportunities their employees face.  

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