Nuances of HSA’s

With the recent focus on healthcare reform, the White House has talked a lot about HSA’s (health savings accounts). While there hasn’t been a lot of detail regarding how HSA’s will bend the cost curve (or won’t), we are seeing creative utilization of high-deductible health plans to expand retirement savings. For many small employers, testing is an issue for their highly compensated employees.

When an HSA is paired with a 401K, it can allow a participant to maximize their 401K at $18,000 (or $24,000 for those who are catch-up eligible) while also fully funding their HSA at $3,400 (or $6,750 for a family). These HSA dollars do not have to be used during the year so the balances can carry forward. Additionally, just like a 401K, the money can be invested in an array of investments so they grow. The benefit of the HSA is that it is more tax effective then a 401K. Money goes in tax deductible, grows tax deferred, and can be used tax free for qualified expenses.

We already know that one of retirees biggest expenses is going to be healthcare so this is a great way to begin accumulating assets for your employees. Many HSA providers have a pre-set list of investments available that just like in the infancy of 401K plans, pay heavy revenue sharing to the provider. With that experience in mind, there are also vendors who allow dollar one investing in professionally managed models without unnecessary revenue sharing.

As employers look at creative ways to lower health costs, high deductible health plans with HSA’s can be one method. If we flip the switch to our retirement plan, it can also be a creative way to get additional dollars into retirement focused savings for those employees who might be restricted in contributions due to discrimination testing on the 401K. If you are working with an experienced retirement plan advisor, they should have some creative ideas on how to accomplish this.

This all sounds a bit too easy though doesn’t it? If the White House does expand HSA’s then this approach could become even more attractive. What roadblocks could exist for this sort of coordinated benefit? The following links to one such issue for those who will be filing for Medicare:

As you can see, working with a knowledgeable advisor is key to making sure this sort of coordinated effort works for you and your employees.