Data & Research July 1, 2015

HSAs a Growing Retirement Savings Opportunity

Workers are still mainly unaware of the long-term tax-free growth health savings accounts (HSAs) can generate.
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A new study from Avidia Bank predicts an impending “wave of investment growth” in health savings accounts (HSAs), despite relatively weak uptake among workplace investors and retirement savers so far.

“Over the past six months, every new group or broker that I encounter has inquired if Avidia offers investment options for HSA programs,” observes Lynda Westbrook, vice president of Avidia Bank’s Healthcare Solutions business. “They tell me that the group’s president, CEO or HR director wants it and that their employees are asking as well.”

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The study, titled “The Coming HSA Investment Wave,” finds that while the ability to invest funds inside an HSA for long-term tax-free growth has been in place for a decade or longer, many HSA owners do not even know it exists and use their accounts only for current or near-term medical care spending. This matches other research findings that HSAs can effectively complement more traditional retirement planning accounts, but only with the proper education and guidance.

Todd Berkley, president of HSA Consulting Services and the study’s author, projects HSA investments are likely to quadruple every three years until at least 2020. This implies growth from $3 billion invested today to $12 billion in 2017 and $40 billion in 2020. The study finds growing HSA balances are in large part being driven by renewed interest among investment advisers and employee benefit services providers beyond health insurance brokers.

Nearly 20 million Americans own an HSA, Avidia finds, but very few HSA owners currently invest regularly in the account and therefore miss the most powerful feature of their accounts.

NEXT: Advisers get active on HSAs 

“Health insurance brokers are not always equipped with the knowledge to offer a full and comprehensive overview of the HSA or in some cases, do not even discuss it at all,” the study observes. “Until now, most people have been introduced to the HSA concept by their employer’s health plan, HR representative or broker.”

Initially, many employers chose the default option of facilitating the opening of HSA accounts with the HSA trustee linked to the health plan offering—or they allowed their employees decide if they needed an account at all. Today, the factors are aligning for greater advocacy for HSAs among the other service provider professionals in the employee benefits space, especially retirement plan advisers.

“The factors are all in place for investments within HSAs to go from a hidden gem to a primary driver of investment growth as financial advisers start taking an active role in promotion of HSAs,” Berkley explains. He says the study “concludes that HSA investment growth is bound to accelerate due to account demographics alone and that focused education could throw gas on the fire.”

“HSAs offer investment professionals the opportunity to help clients with trusted expertise in the increasingly critical arena of healthcare planning and spending,” Westbrook concludes. “By studying the concept and creating partnerships to offer a top-notch program to your clients, you can set yourself apart in your firm and show others how to create a valuable extension to the retirement savings plans of your firm.”

The study is available at AvidiaHealth.com or AskMrHSA.com. 

Compliance July 1, 2015

Tips for Surviving an IRS Plan Audit

An HR director from Vanderbilt University shared tips from her IRS 403(b) plan audit experience with attendees of the NTSA 403(b) Summit.
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Retirement plan sponsors may feel understandably panicked when they get a notice from the Internal Revenue Service (IRS) that their plan is being audited.

As soon as a plan sponsor gets notice, it should contact its third-party administrator (TPA), attorney and plan providers, Robert Ard, senior vice president and chief compliance officer at TSA Consulting Group, told attendees at the National Tax-Deferred Savings Association (NTSA) 403(b) Summit.

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Ard also suggested preparing individuals from human resources (HR), payroll and information technology (IT) groups. “But the fewer people you have talking to an agent, the better,” Ard said.

Terri N. Armstrong, human resources assistant director at Vanderbilt University & Medical Center, said its 403(b) plan was audited in 2010 for the 2008 plan year. One thing she learned is, as a company has turnover in HR or benefits, it should train new employees about audits.

When notified of an audit, the IRS will send one or more IDRs (information document requests). During the review by the IRS, additional questions may come up and result in more IDRs. Ard said the IDRs are supposed to be concise, but employers should make sure they understand what the IRS is asking and only give the agency what it asks for. He added that if old providers will not cooperate or are slow in providing information, plan sponsors should communicate that with the agent performing the audit.

Armstrong told summit attendees plan sponsors should keep up with all the IDRs received and retain copies of the information provided to the IRS, because new IDRs may reference old ones.

NEXT: Responding to agent requests and fixing errors.

Ed Salyers, owner of Ed Salyers CPA and former senior employee plans specialist with the Tax-Exempt and Governmental Entities Division of the Internal Revenue Service, said internal controls can make or break an audit. “Having internal controls will impress the agent,” he said. “An agent may ask about loans even if that is not on the IDR, and if the plan sponsor has no internal controls or internal controls are bad, loans will be added to the audit.”

As an example, Armstrong shared that when the agent auditing Vanderbilt’s plan asked about distributions, she had employees write down the process used for each distribution questioned. “I think that spared us from a more detailed audit,” she said.

According to Salyers, key internal control areas are:

  • Eligibility/discrimination;
  • Contributions/limitations;
  • Vesting;
  • Distributions; and
  • Reconciliations with providers or TPAs.

He said the IRS will look at plan documents, employee handbooks and company websites to make sure they all agree about plan features and processes. If not, the agent will add to the audit list.

Armstrong said the IRS found Vanderbilt had some language deficiencies in its document about certain contracts. It had to make plan amendments. Ard added that keeping up with required document language and required amendments is one of the reasons it is good to work with a TPA or attorney.

According to Armstrong, to comply with the universal availability requirement for 403(b)s, Vanderbilt includes retirement plan communications in the annual open enrollment communications for other benefits. It also puts notice of eligibility to participate in the plan in regular newsletters.

The IRS audit also found excess 15-year catch-up contributions in Vanderbilt’s plan. Armstrong said the university is now phasing out that plan feature. It has started tracking excess annual additions and sends notices to everyone, targeting those who may have other 403(b) accounts. Vanderbilt tracks those outside accounts about which it is notified.

She pointed out that Vanderbilt was able to fix errors found through the IRS’s voluntary correction program (VCP).

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