Although health savings accounts (HSAs) have been around since 2004, renewed interest in these accounts is being fueled, in part, by rising health care costs and bipartisan congressional support for them in a year of pending tax reform. Just as defined benefit plans are becoming a thing of the past, full coverage health plans are being replaced by high deductible health plans (HDHP), paving the way for HSAs to become an important retirement savings tool. What does this mean for 403(b) plans and how can they be integrated in to a 403(b) offering?
Employees who participate in a HDHP (defined as having a deductible of at least $1,300 for single coverage and $2,600 family coverage with out-of-pocket maximums of $6,550 and $13,100 respectively with annual adjustments) are eligible to contribute to an HSA.
Additionally, the employee must not be covered by other health coverage that is not a HDHP and cannot be enrolled in Medicare. HSAs are individual accounts that can be funded by the employee and the employer. Like an IRA, there are annual contribution limits that apply, and any money deposited into the account belongs to the employee.
For 2017, the annual contribution allowed to an HSA is capped at $3,400 for individual coverage and $6,750 for family coverage. These limits include both employer and employee contributions. Like 403(b) plans, individuals age 55 and older are granted a catch-up provision providing for an additional amount to be contributed. For 2017, this catch-up amount is $1,000 annually.
Spending vs Saving Accounts
HSAs are primarily used as spending accounts by individuals to pay current medical expenses. The education given to HSA participants is generally part of the problem with HSAs. In most 403(b) plans, participants are given access to a variety of educational resources, from a professional financial advisor to online tools at the investment provider.
Most HSA decisions are made during the employer open enrollment for health benefits, with the primary focus on the health insurance plan with the HSA as an afterthought. In addition, most employees mistakenly believe the flexible spending account (FSA) “use it or lose it” rule applies to HSAs as well. The lack of education limits employees from understanding and taking full advantage of the benefits available through an HSA.
There is nothing wrong with using an HSA as a spending tool. But the additional savings benefits must be considered due to the amount of money needed during retirement to cover healthcare expenses. (Fidelity estimates couples will spend $260,000 in healthcare costs in retirement).
If possible, employees should consider paying for current medical expenses out-of-pocket and allow the HSA to grow for future use. There are no time restrictions on when HSA funds must be spent. A participant may save their receipts of all medical expenses and allow the funds to grow tax-free until the money is needed. Then, if all receipts were kept, they can withdraw the amounts, tax-free, relating to the corresponding medical expenses.
403(b) and HSA — Where to Contribute First and How to Coordinate?
Financial advisors are well-positioned to educate employees on the benefits of contributing to an HSA, from the perspective of saving, investing, and retirement planning. HSAs combine the benefits of a pre-tax 403(b) contribution with the Roth benefits of tax-free growth and tax-free withdrawal. This is because HSAs are triple-tax advantaged. First, contributions are tax deductible. Second, investment earnings and interest are tax-exempt. Third, withdrawals avoid taxation if they’re spent on qualified medical expenditures.
Most advisors servicing both the 403(b) and HSA market agree that employees should first contribute to the retirement account sufficient to receive the maximum match, if available. Then employees should contribute the maximum amount to the HSA followed by continuing to contribute to the retirement account up to the limit.
A major benefit of integrating the 403(b) plan with the HSA plan is the ability to integrate the participant statement. In this way, the financial advisor can support the participant by showing the effect of the 403(b) plan together with the HSA. Having one retirement statement will also help the employees to view the HSA as a savings account rather than a spending account with money moving in and out like a checking account.
The Future of HSAs
Retirement and healthcare are on the minds of most American workers as well as those in Congress. There are currently changes being considered in Congress that would nearly double the contribution limits for HSAs. In addition, some retirement groups are calling for changes to integrate HSAs with retirement accounts by providing access to the same investment options for both HSA and retirement accounts.
We are in the middle of a changing time for retirement and healthcare. It is vital to the success of the industry, to the financial advisor, and most importantly to each plan participant to learn and understand the tax benefits of the HSA and how to integrate their HSA with their 403(b) plan.
Nathan Glassey, TGPC, QKA, Vice President, Non-ERISA Retirement Services, for National Benefit Services.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.