Com­men­tary

In ad­di­tion to be­ing triple tax-free, health sav­ings ac­counts can make a sig­nif­i­cant dif­fer­ence for work­ers’ re­tire­ment plan­ning

Employee Benefit News - - CONTENTS - BY ROBERT C. LAWTON Robert C. Lawton, AIF, CRPS, is the founder and pres­i­dent of Lawton Re­tire­ment Plan Con­sul­tants, LLC.

There are a num­ber of rea­sons, in­clud­ing tax-free ad­van­tages and help with re­tire­ment sav­ings, why em­ploy­ees should max out HSA con­tri­bu­tions.

With open en­roll­ment sea­son quickly ap­proach­ing, plan spon­sors may want to spend some time ed­u­cat­ing par­tic­i­pants on the use of health sav­ings ac­counts. I be­lieve that nearly every­one el­i­gi­ble to con­trib­ute to an HSA should max out their HSA con­tri­bu­tions each year. Here’s why.

HSAs are triple tax-free. HSA pay­roll con­tri­bu­tions are made pre­tax and when bal­ances are used to pay qual­i­fied health­care ex­penses, they come out of HSA ac­counts taxfree. Earn­ings on HSA bal­ances also ac­cu­mu­late tax-free. There are no other em­ployee ben­e­fits that work this way.

HSA pay­roll con­tri­bu­tions are truly tax-free. Un­like pre-tax 401(k) con­tri­bu­tions, HSA con­tri­bu­tions made from pay­roll de­duc­tions are truly pre-tax in that Medi­care and So­cial Se­cu­rity taxes are not with­held. Both 401(k) pre-tax pay­roll con­tri­bu­tions and HSA pay­roll con­tri­bu­tions are made with­out de­duc­tions for state and fed­eral taxes.

No use it or lose it. Un­like flex­i­ble spend­ing ac­counts, where bal­ances not used dur­ing a par­tic­u­lar year may be for­feited, with HSAs, un­used bal­ances carry over to the next year. And so on, for­ever (at least un­til the em­ployee passes away). HSA bal­ances are never for­feited due to lack of use dur­ing a year.

Funds can be used for re­tiree health­care ex­penses. Any­one for­tu­nate enough to ac­cu­mu­late an HSA bal­ance that is car­ried over into re­tire­ment may use it to pay for many rou­tine and non-rou­tine health­care ex­penses. HSA bal­ances can be used to pay for pre­scrip­tion drugs, med­i­cal pre­mi­ums, CO­BRA pre­mi­ums, den­tal ex­penses, Medi­care pre­mi­ums, longterm care in­sur­ance pre­mi­ums and, of course, any co-pays, de­ductibles or co-in­sur­ance amounts. There are no age 70.5 min­i­mum dis­tri­bu­tion re­quire­ments on HSA ac­counts like there are on 401(k) and IRA ac­counts. This makes HSA ac­counts a much more tax-ef­fi­cient way of pay­ing for health­care ex­penses in re­tire­ment, es­pe­cially if the al­ter­na­tive is tak­ing a tax­able 401(k) or IRA dis­tri­bu­tion.

Mod­est con­tri­bu­tion lim­its.

Max­i­mum an­nual HSA con­tri­bu­tion lim­its (em­ployer plus em­ployee) for 2018 are mod­est — $3,450 per in­di­vid­ual and $6,900 for a fam­ily. An­other $1,000 in catch-up con­tri­bu­tions is per­mit­ted for those age 55 and older.

Helps with re­tire­ment plan­ning.

Most em­ploy­ees would likely ben­e­fit from the fol­low­ing con­tri­bu­tion strat­egy in­cor­po­rat­ing HSA and 401(k) ac­counts: First, em­ploy­ees should con­trib­ute the per­cent­age that al­lows them to re­ceive the max­i­mum com­pany match in their 401(k) plan. There is no bet­ter in­vest­ment any em­ployee can make than re­ceiv­ing free money. Then, em­ploy­ees should fill up their HSA ac­counts us­ing pay­roll con­tri­bu­tions. If the abil­ity to con­trib­ute still ex­ists, em­ploy­ees should then max out their con­tri­bu­tions to their 401(k) plan by mak­ing ei­ther the max­i­mum per­cent­age con­tri­bu­tion or reach­ing their an­nual limit.

The keys to build­ing an ac­count bal­ance that can carry over into re­tire­ment in­clude max­ing out HSA con­tri­bu­tions each year and in­vest­ing un­used con­tri­bu­tions so ac­count bal­ances can grow. If your HSAs don’t of­fer in­vest­ment funds, think about adding them soon.

HSAs will con­tinue to be­come a more im­por­tant source of funds for re­tirees to pay health­care ex­penses as high-de­ductible health plans be­come more preva­lent. Make sure you ed­u­cate your em­ploy­ees on their use.

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