As employers increasingly offer financial wellness programs that cover both financial and physical well-being, it has become necessary for retirement plan advisers to expand their knowledge to include various options available to participants to save for health care costs, experts say.
“A lot of times, employers in the mid to the upper end of the marketplace, those with 500 employees or more, have an adviser for their retirement plan and a consultant for all of their medical benefits, including life and disability insurance,” says Rob Grubka, president of employee benefits at Voya in Minneapolis. “Whether or not the adviser is dealing with all of the employer’s benefits, it is incredibly important that they have a holistic view of what the employers want to offer their employees.”
Steve Christenson, executive vice president at Ascensus in Brainerd, Minnesota, agrees that advisers need to be conversant on the various health care savings options available, and how they may benefit both participants and employers: “Advisers don’t necessarily need to know chapter and verse the details on health savings accounts (HSAs), flexible savings accounts (FSAs) and health reimbursement accounts (HRAs), but these accounts are going to compete with what participants and employers can contribute to the 401(k),” so they need to be familiar with them.
The most important thing that advisers need to realize about tax-advantaged HSAs, FSAs and HRAs is that “consumers are spending $387 billion a year in out-of-pocket health care costs, yet only 17% of spending on health care is flowing through these accounts,” says Jen Irwin, senior vice president of marketing and strategy at Alegeus in Milwaukee. “This means that consumers are mostly spending post-tax dollars on their health care, leaving 25% to 30% tax savings on the table. Employers, too, are losing on FICA [federal insurance contribution act] savings contributed to these accounts.”
HSAs Preferred ‘Hands Down’
Hands-down, the experts say that the HSAs, which can only be offered when paired with a high deductible health plan, offer the biggest benefits to employees because of their triple tax advantages and because these are the only health care savings accounts that are owned by the employee and portable throughout their lives.
“We view health savings accounts as having the potential to be the next big retirement savings vehicle,” says Kevin Murphy, head of defined contribution strategic accounts at Franklin Templeton in New York. Contributions to HSAs are made pre-tax; profits on assets invested grow tax free; and if the monies are used on IRS-qualified medical expenses, the withdrawals are not taxed, Murphy notes. Then, at age 65 or older, the money can be used for non-medical purposes without incurring a 20% penalty, although if it is used for non-medical purposes, it will be taxed as income, he says.
In addition, HSAs are not subject to required minimum distribution rules, Murphy says.
“When we talk to retirement plan advisers, we underscore that HSAs are very efficient vehicles, essentially another form of an IRA [individual retirement account],” he explains. “We have 100,000 advisers at our firm. For the retirement specialists in our DCIO [defined contribution investment only] division, HSAs are a great fit. They allow a parallel conversation to retirement savings discussions, because health care will be one of the largest, if not the largest expense people face in retirement.”
As employers’ views of health and financial wellness merge, HSAs are a natural entry point for advisers to talk about both topics with current clients and prospect, Murphy says.
Since retirees will be paying for Medicare part B and D premiums for years, if not decades, HSA accounts’ ability to stretch people’s money 20% to 30%, depending on their tax rate, is “a very important benefit for advisers to know about,” agrees Kevin Robertson, senior vice president and chief revenue officer for HSA Bank in Milwaukee.
Both employees and employers can contribute to an HSA, notes Stuart Ritter, a senior financial planner with T. Rowe Price in Baltimore. In 2019, the HSA contribution limit is $3,500 for individuals and $7,000 for families. Those figures will rise to $3,550 and $7,100, respectively, in 2020, and the 2019 $1,000 catch-up contribution for those over age 55 will remain the same next year.
However, one potential downside to HSAs is the fact that, should an HSA owner die and the money goes to a non-spouse beneficiary, the IRS considers that money to be taxable income in the year in which it is received, Ritter says. “If the beneficiary is in a higher tax bracket than the previous HSA owner, it is taxed at an even higher rate,” he notes. “This doesn’t happen with IRAs or 401(k)s.”
It is also important to consider that an HSA account holder can use the money in the account for themselves, their spouse or their dependents, and that the money can be invested, Ritter says. The design of HSAs gives people “the flexibility and the power to figure out how to use the funds throughout the ebbs and flows of their lives,” Ritter says.
FSA Pair With Other Benefits
Flexible spending accounts can be paired with any type of health care plan, and like a HSA or 401(k), a participant’s contributions can reduce a participant’s taxable income, Christenson says. However, the employer owns the funds, and should the account holder not use all of the monies for health care expenses in a given calendar year, it is a “use it or lose it” proposition, he notes.
“The onus is put on the employee to make their best guess on what they will spend on medical expenses,” he notes. “This takes a lot of planning and is hard for most people.”
There is one type of FSA, a limited purpose FSA, which can be used for preventative care and be paired with a high deductible health plan, Grubka says. Furthermore, some employers are permitting limited rollovers of money, typically $500, from one calendar year to another, Irwin says. And with a FSA, the employer can also make contributions, he says.
In 2019, the FSA contribution limit is $2,700, and that will increase to $2,750 in 2020.
Don’t Forget the HRA
A third type of health care savings account is health reimbursement accounts, HRAs. “HRAs are defined completely by the employer,” Christenson says. “They decide whether to offer it and how many dollars to contribute and what they can be used for, and these are employer dollars, so if the employee leaves the company, the money rolls back to the employer.”
HRAs are most common in the governmental and tax-exempt part of the marketplace, Grubka says.
The bottom line, Irwin says, is that “consumers today are responsible for a greater share of their health care costs,” Irwin says. “Whether they are in a high deductible health plan or in traditional coverage, deductibles are rising faster than wages. We know that this is a challenge, and we believe that consumer-directed accounts are really the foundation for how consumers will get better value for their health care dollars.”
Advisers should also know that a recent Plan Sponsor Council of America survey found that 75% of sponsors that offer HSAs view them as part of their retirement strategy, Ritter adds.
“Even if an employer does not currently offer a health savings account, it might be in the back of their mind to help their employees prepare for retirement,” he says. “It is important that plan advisers understand at least the basics of health savings and be prepared for that question—otherwise, another adviser could bring it up.”