Health Savings Accounts: Your Healthcare 401(k)
HSAs. By now, most employers know what they are and how they work. In fact, HSAs have drastically increased in popularity within the past few years. More and more employers are offering these plans to their employees and many of them are even funding a portion of the HSA on behalf of their employees as way to entice them to choose the HSA plan over a traditional PPO plan.
It’s no secret that HSAs are a win/win option for employees and employers. Employees like them because they have access to a health plan with lower payroll contributions than a traditional PPO and they can fund their HSA with tax-free dollars. Because HSAs are paired with a High Deductible Health Plan (HDHP), employers enjoy the benefits of a greater employee cost share which translates into reduced claim costs.
Even though they’ve met with employees and educated them on the many advantages of participating in an HSA, many employers are still finding it difficult to convince their employees that HSAs offer additional benefits beyond tax savings and lower premiums. So, why are employees still so hesitant to board the HSA train?
Maybe now is the time to stop focusing on the short term advantages of HSAs and start educating your employees on the long term benefits. The key is to get your employees to stop focusing on the immediate tax savings available through an HSA and start getting them to think of it as a long term retirement plan for the medical expenses they will incur after retirement.
Here are two simple facts that you may want to share with your employees regarding HSAs:
1. The Future of Medicare
It’s not a pretty picture, my friends. As more and more Baby Boomers are retiring, there will be an increasing number of Medicare beneficiaries receiving benefits over the next 10-20 years. Because of this, there will be a declining number of workers making payroll tax contributions which will result in a grossly underfunded Medicare system in 2026 and beyond. This means that employees currently under the age of 55 can expect extensive cuts to Medicare by the time they reach Medicare eligibility. We can also expect additional out-of-pocket costs and increased premiums for Medicare supplement policies available through an insurance carrier.
To prepare themselves for this, employees should try to grow their HSA fund as much as possible in the years prior to attaining age 65 because at that time, they are no longer eligible to contribute to their HSA – even if they’re still actively employed and enrolled in the HDHP through their employer. You may also want to encourage them to dedicate their HSA contributions to their retirement by paying for today’s health costs with other savings and not dipping into their HSA funds. By doing this, they can continue to grow their HSA balance for expenses incurred after they reach age 65. Although there’s never a penalty to use HSA dollars to pay for eligible healthcare expenses (regardless of your age). You can use HSA dollars to pay for any expenses, including non-healthcare related expenses-without penalty, once you have reached age 65. This is one of the greatest benefits of waiting until age 65 to start using those HSA funds! Any HSA funds used to pay for non-healthcare related items prior to age 65 will be taxed and have a 20% penalty assessed.
2. HSA vs 401(k)
HSAs and 401(k) plans have many similarities. Both of these options allow employees to save money on a pre-tax basis with tax deferred growth and both provide penalty-free retirement income.
Like a 401(k) plan, HSAs also allow for investment offerings. Many employees aren’t aware that HSA banking institutions allow them to invest HSA dollars in the same manner as 401(k) plans. This allows the participant in grow these tax free dollars even further. Investment options vary by banking institution and most require that you have a minimum balance (usually between $1,500-$2,000) before they allow participants to take advantage of their investment options.
Where 401(k) plans and HSAs differ is that at your eligible retirement age, 401(k) distributions are always taxable but HSA distributions are never taxed as long as they’re used for eligible healthcare expenses, including but not limited to medical, dental, vision and even Medicare premiums. This is a huge differentiator and another reason why HSAs should be viewed as a “Healthcare 401(k) Plan”.
A member of our 'A' team is happy to assist with any further HSA or 401(k) questions!
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