PLANADVISER - September/October 2019 - 52

beyond(k)
post-tax dollars on their health care, leaving 25% to 30%
tax savings on the table. Employers, too, are losing on FICA
[Federal Insurance Contribution Act] savings contributed to
these accounts. "
'A' Is for 'Advantages' With Health Savings Accounts
Hands down, experts say, of the three options, HSAs offer
the biggest benefits to employees. A drawback is that they
must be paired with a high-deductible health plan (HDHP).
But they have triple tax advantages and are the only health
care savings accounts that are owned by the employee and
portable throughout the person's life.
" We view health savings accounts as having the potential
to be the next big retirement savings vehicle, " says
Kevin Murphy, head of defined contribution (DC) strategic
accounts at Franklin Templeton in New York City. Contributions
to HSAs are made
" ... deductibles
are rising faster
than wages. "
pre-tax; profits on assets
invested grow tax-free;
and if the monies are used
for IRS-qualified medical
expenses, the withdrawals
are not taxed, Murphy
notes. For those aged 65
or older, the money may be used for nonmedical purposes
without incurring a 20% penalty. If the money is used for
nonmedical purposes, though, it will be taxed as income,
he says.
In addition, HSAs are not subject to required minimum
distribution (RMD) rules, Murphy says.
" When we talk to retirement plan advisers, we underscore
that HSAs are very efficient vehicles, essentially
another form of an IRA [individual retirement account], " he
says. " For the retirement specialists in our DCIO [defined
contribution investment only] division, HSAs are a great
fit. They allow a parallel conversation to retirement savings
discussions, because health care will be one of the largest, if
not the largest, expenses people face in retirement. "
According to Irwin, " Consumers today are responsible
for a greater share of their health care costs. Whether
they are in a high-deductible health plan or in traditional
coverage, deductibles are rising faster than wages. We know
this is a challenge, and we believe that consumer-directed
accounts[-be they HSAs, FSAs or HRAs-]are really the
foundation for how consumers will get better value for their
health care dollars. "
As employers' views of health and financial wellness
merge, HSAs are a natural entry point for advisers, enabling
them to talk about both topics with either current clients or
prospects, Murphy says.
Because retirees will be paying for Medicare Part B and D
premiums for years, if not decades, HSAs' ability to stretch
people's money 20% to 30%, depending on their tax rate, is
" a very important benefit for advisers to know about, " agrees
Kevin Robertson, senior vice president and chief revenue
officer for HSA Bank in Milwaukee.
Both employees and employers may contribute to an
HSA, notes Stuart Ritter, a senior financial planner with T.
Rowe Price in Baltimore. This year, the HSA contribution
limit is $3,500 for individuals and $7,000 for families. Those
figures will rise to $3,550 and $7,100, respectively, in 2020;
the 2019 catch-up contribution of $1,000 for those over 55
will remain the same next year.
Another downside, potentially, to HSAs is that, should the
owner die and the money go to a non-spouse beneficiary, the
IRS will tax it as income in the year it is received, Ritter says.
" If the beneficiary is in a higher tax bracket than the previous
HSA owner, it is taxed at an even higher rate, " he explains.
" This doesn't happen with IRAs or 401(k)s. "
It is also important to consider that an HSA holder may
use the money in the account for a spouse or dependents,
plus in many HSA programs the money may be invested,
Ritter says. The design of HSAs gives people " the flexibility
and the power to figure out how to use the funds throughout
the ebbs and flows of their lives, " Ritter says.
FSAs Pair With Other Benefits
Flexible spending accounts may be paired with any type of
health care plan, and, as with an HSA or 401(k), a participant's
contributions can reduce his taxable income, Christenson
says. However, the employer owns the funds, which
can make this a " use-it-or-lose-it " proposition for the
employee if he sets aside more money for health care costs
in the coming calendar year than he ends up spending.
" The onus is put on employees to make their best guess
on what they will need for medical expenses, " he points out.
" This takes a lot of planning and is hard for most people. "
There is one type of FSA, a limited purpose FSA, that
can be used for preventive care and be paired with a highdeductible
health plan, Grubka says.
Further, some employers are permitting limited rollovers
of money, typically $500, from one calendar year to
the next, Irwin says. And, with an FSA, the employer can
also make contributions, he says.
This year, the FSA contribution limit, including from the
employer, is $2,700; it will increase to $2,750 next year.
Don't Forget the HRA
A third type of health care savings account is health reimbursement
accounts. " HRAs are defined completely by the
employer, " Christenson says. " It decides whether to offer
[one], how many dollars to contribute and what they can
be used for. These are employer dollars, so if the employee
leaves the company, the money rolls back to the employer. "
HRAs are most common in the governmental and taxexempt
part of the marketplace, Grubka says.
Advisers should also know that a recent Plan Sponsor
Council of America (PSCA) survey found 75% of sponsors
that offer HSAs view them as part of their retirement
strategy, Ritter says. " Even if an employer doesn't currently
offer a health savings account, it's important that advisers
understand the basics of health savings and be prepared for
questions-otherwise, another adviser could bring it up. "
-Lee Barney
52 | planadviser.com September-October 2019
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