PANC 2017: The Role of HSAs

Many people are concerned about paying for health care in retirement, and health savings accounts (HSAs) have begun to be promoted as a way to save for those expenses, not just to pay for current health care costs.

One reason advisers may want to get into the business of HSA education is many employers no longer provide health care benefits to retirees, said Jamie Greenleaf, principal and lead consultant at Cafaro Greenleaf and moderator of “The Role of HSAs,” Thursday, at the 2017 PLANADVISER National Conference (PANC).

As employers try to save on health care costs, Greenleaf noted, there has been a big move to high-deductible health plans (HDHPs); and HSAs can only be offered in conjunction with an HDHP. There are about 20 million participants in HSAs, she said.

Steve Christenson, executive vice president, retirement and health savings plan services at Ascensus, observed, not all employers that offer HDHPs pair them with an HSA; roughly half do.

Kenneth Forsythe, assistant vice president, product strategy, at Empower Retirement, said Empower positions HSAs as “no better vehicle for saving for medical expenses in retirement, period.” He added that employees with these accounts should be saving the maximum amount possible; they can use it for current medical expenses if they need to, but—a new position for Empower—HSAs are really best used as a retirement savings plan.

To grow their HSA business, advisers need to point out that retaining money in the account beyond the current year can help participants pay medical expenses in retirement, according to Forsythe. “Participants may be saving quite a bit in their defined contribution plans, but they could reallocate money into an HSA,” he said. “They should save enough in the DC plan to maximize the employer match and reallocate the rest of their savings into HSAs.”

Forsythe sees is a trend in plan sponsors sending requests for proposals (RFPs) for HSAs, and this is a chance for advisers to help. Advisers should get to know the different HSA providers and what they offer. He added that some HSAs allow participants to invest their savings. Where the adviser role comes into play is in helping participants with investment selection.

Forsythe told panel attendees that HSAs are covered under the Department of Labor (DOL)’s new fiduciary regulations if the accounts offer investments. However, just because an HSA requires some fiduciary oversight, this does not make it an Employee Retirement Income Security Act (ERISA) plan. “They are individual accounts, unlike all the trusts retirement plan advisers deal with,” he said.

There is no statute of limitations for participants to use HSAs to reimburse themselves for out-of-pocket medical expenses, according to Forsythe. “They could potentially, 20 years later, take all of their receipts and get reimbursed,” he said. In addition, participants do not pay FICA [Federal Insurance Contributions Act] taxes on HSA contributions, and employers save on the FICA exemption. After age 65, if an individual takes money out of an HSA for nonmedical expenses, he can pay regular taxes on the withdrawal, he said.

Many employees believe Medicare covers everything in retirement, but it doesn’t. And, Medicare premiums take about one-third of retirees’ Social Security benefits. “If individuals can reimburse themselves for medical expenses from an HSA, it is a tax-saving event,” Christenson pointed out. Money saved this way is a help, when Medicare premiums absorb about one-third of retirees’ Social Security benefits. Many employees believe Medicare covers everything in retirement, but it doesn’t, he said. He added that a holder of an HSA may not be considered as a dependent on another person’s tax return.

To further educate plan sponsor clients about HSAs, Christenson suggested mentioning the value of contributing to the accounts. “Just like adding an employer match increases DC plan participation, employer contributions to HSAs will encourage participation,” he said.