Recently there has been a lot written about HSA’s (health savings accounts). The current administration has talked about them significantly when discussing healthcare reform. They also come into play when talking about tax reform as well. Here are the basics on HSA’s: 1) They allow for saving for qualified health expenses, 2) They operate like 401k’s in that they can be invested for growth and that growth is tax deferred, 3) They don’t have to be spent from one year to the next like FSA’s, 4) You have to use a HDHP (high deductible health plan) to qualify for contributions to an HSA.
HSA’s are more tax efficient than 401k’s as the money that funds them is tax deductible, the growth is tax deferred, and if using them for qualifying expenses they are tax free. A 401K can only claim 2 of these 3. 401K plan advisors are excited about this proposition. Who better to guide employers on HSA’s to use due to the similarities to 401K’s. The main issue is that employees aren’t exactly awash in extra cash to defer. If they have health expenses, is it possible that money goes into the HSA instead of the 401k? We think so.
For highly compensated employees the opportunity for additional tax preferred savings is considerable. If I am healthy and there is an expansion of the HSA annual limits (currently $3,400 for individuals and $6,750 for families) then I can defer not only my 401K max but also fully fund my HSA. The Trump administration has discussed doubling these limits so someone over 50 could reasonably expect to be able to save $24,000 for 401K and $13,400 for HSA in a single year. Unfortunately for the budget to work, the tax savings to allow for these has to come from somewhere and our guess is 401K’s could be dinged. We also don’t think that other than select employees, the HSA would be used as a vehicle for growth.
There are many potential issues which we will discuss when more is known about health & tax reform but the buzz will continue on HSA’s as tea leaves are read.