The Health Savings Alphabet

It is common today for employers to offer wellness programs that cover not only financial well-being but health well-being, too. Retirement plan advisers, therefore, need to expand their knowledge, experts say. They must be able to explain the various means by which participants can save to pay for health care.

“Many times, employers in the middle 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’s incredibly important that he 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 should be conversant in the various health care savings options available and how those may benefit both participants and employers: “Advisers don’t necessarily need to know, chapter and verse, the details on health savings accounts [HSAs], flexible spending 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 “consumers are spending $387 billion a year on 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.”

‘A’ Is for ‘Advantages’ With Health Savings Accounts

Hands down, experts say, of the three options, HSAs offer the biggest benefits to employees. A drawback is that they must be paired with a high-deductible health plan (HDHP). But they have triple tax advantages and are the only health care savings accounts that are owned by the employee and portable throughout the person’s life.

“We view health savings accounts as having the potential to be the next big retirement savings vehicle,” says Kevin Murphy, head of defined contribution (DC) strategic accounts at Franklin Templeton in New York City. Contributions to HSAs are made pre-tax; profits on assets invested grow tax-free; and if the monies are used for IRS-qualified medical expenses, the withdrawals are not taxed, Murphy notes. For those aged 65 or older, the money may be used for nonmedical purposes without incurring a 20% penalty. If the money is used for nonmedical purposes, though, it will be taxed as income, he says.

In addition, HSAs are not subject to required minimum distribution (RMD) 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 says. “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, expenses people face in retirement.”

According to Irwin, “Consumers today are responsible for a greater share of their health care costs. Whether they are in a high-deductible health plan or in traditional coverage, deductibles are rising faster than wages. We know this is a challenge, and we believe that consumer-directed accounts[—be they HSAs, FSAs or HRAs—]are really the foundation for how consumers will get better value for their health care dollars.”

As employers’ views of health and financial wellness merge, HSAs are a natural entry point for advisers, enabling them to talk about both topics with either current clients or prospects, Murphy says.

Because retirees will be paying for Medicare Part B and D premiums for years, if not decades, HSAs’ 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 may contribute to an HSA, notes Stuart Ritter, a senior financial planner with T. Rowe Price in Baltimore. This year, 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; the 2019 catch-up contribution of $1,000 for those over 55 will remain the same next year.

Another downside, potentially, to HSAs is that, should the owner die and the money go to a non-spouse beneficiary, the IRS will tax it as income in the year 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 explains. “This doesn’t happen with IRAs or 401(k)s.”

It is also important to consider that an HSA holder may use the money in the account for a spouse or dependents, plus in many HSA programs the money may 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.

FSAs Pair With Other Benefits

Flexible spending accounts may be paired with any type of health care plan, and, as with an HSA or 401(k), a participant’s contributions can reduce his taxable income, Christenson says. However, the employer owns the funds, which can make this a “use-it-or-lose-it” proposition for the employee if he sets aside more money for health care costs in the coming calendar year than he ends up spending.

“The onus is put on employees to make their best guess on what they will need for medical expenses,” he points out. “This takes a lot of planning and is hard for most people.”

There is one type of FSA, a limited purpose FSA, that can be used for preventive care and be paired with a high-deductible health plan, Grubka says.

Further, some employers are permitting limited rollovers of money, typically $500, from one calendar year to the next, Irwin says. And, with an FSA, the employer can also make contributions, he says.

This year, the FSA contribution limit, including from the employer, is $2,700; it will increase to $2,750 next year.

Don’t Forget the HRA

A third type of health care savings account is health reimbursement accounts. “HRAs are defined completely by the employer,” Christenson says. “It decides whether to offer [one], how many dollars to contribute and what they can be used for. 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.

Advisers should also know that a recent Plan Sponsor Council of America (PSCA) survey found 75% of sponsors that offer HSAs view them as part of their retirement strategy, Ritter says. “Even if an employer doesn’t currently offer a health savings account, it’s important that advisers understand the basics of health savings and be prepared for questions—otherwise, another adviser could bring it up.”

Art by Amy Matsushita-Beal