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Why Any Plan Sponsor Fiduciary Needs to Give HSAs Another Look

September 16
00:03 2014

When Phil Chiricotti cites industry reports saying, “HSA assets held by the top 100 providers reached $26 billion as of 6/30/14, a 26% increase from the prior year,” he wants you to listen. When goes on to say, “HSA accounts will grow to 1219484_12178642_caduceus_stock_xchng_royalty_free_30020 million by the end of 2016 and assets will approach $40 billion, including almost $7 billion in investment accounts,” you better be listening. Chiricotti, who outlined this data and more in his September 9, 2014 Center For Due Diligence (CFDD) newsletter (read it here), tells FiduciaryNews.com the HSA topic is so critical and timely, he’s developed a second special pre-conference program devoted exclusively to HSAs for CFDD’s October 15-17, 2014 Advisor Conference. This pre-conference will occur Tuesday, October 14 at the same location (Grand Hyatt San Antonio River Walk hotel) as the Advisor Conference.

Marcia Wagner of The Wagner Law Group in Boston, Massachusetts, who will headline one of the pre-conference HSA sessions (and will also speak at the main conference later in the week), says, “Banks, insurance companies, and investment firms with active IRA programs may be interested in making their programs friendly for employers that want to make the HSAs widely available to employees with education as to the advantages of keeping the HSA accounts invested.” But, she adds, “It will be critical for anyone marketing or offering these programs to be very sensitive to the conditions for exemption from ERISA. Some employers may be willing to offer HSAs as a fully ERISA-covered benefit, but most will want to stay ERISA-exempt, and for the latter category it will be necessary to keep the program simple and be very careful with the handling of investment options.”

“I think there are some interesting parallels between the shift from DB to DC in retirement plans and the shift from traditional health insurance at work (“DB”) to more “consumer-directed” (DC) programs,” says Nevin Adams, Washington, D.C.-based Chief of Communications for ASPPA and Editor-in-Chief of NAPA Net and NAPA Net the Magazine.  Adams believes “most individuals have no idea how much their health insurance actually costs, only what part of it they are asked to pay.  Similarly, many/most individuals didn’t understand their DB benefit accruals, or how that worked.” He says, “These programs are getting more focus now because retiree medical has largely disappeared in the corporate sector (since accounting rules – FAS 106 – in the mid-1990s), and accounting rule changes are already having an impact on their availability in the public sector as well. And, though a very few organizations like EBRI have long taken such costs into account in their projections (many don’t), you know see provider organizations speaking to a discrete retirement savings target for those kind of expenses, so individuals are more aware of them.”

Adams points to a recently published EBRI report “that noted that ‘Individuals with a goal of minimizing taxes and maximizing savings for health care expenses in retirement may choose to maximize contributions to an HSA before contributing to a 401k plan or other retirement savings vehicle. However, the potential loss of employer matching contributions to a 401k plan must also be weighed against any tax savings from shifting contributions from a 401k plan to an HSA. In addition, in order to maximize the savings in an HSA to cover health care expenses in retirement, HSA owners would need to pay the medical expenses they incur prior to retirement on an after-tax basis using money not contributed to their HSA. Many individuals may not have the means to both save in an HSA and pay their out-of-pocket health care expenses. There is already evidence that rising health care costs are resulting in reduced contributions to retirement savings plans, such as 401ks and IRAs.”

Though similar, HSAs are not to be confused with Medical Savings Accounts (MSAs). “In 1996,” according to web-site of the National Center for Policy Analysis, “Congress created a pilot project allowing tax-free MSAs for the self-employed and small businesses. The program mandated a cap of 750,000 policies, but numerous restrictions resulted in only a tenth that number being purchased. One of those restrictions was the design of MSA plans.” HSAs come about a few years later in response to this non-start of MSAs. The IRS web-based Resource Center says, “Health Savings Accounts (HSAs) were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses.  Generally, an adult who is covered by a high-deductible health plan (and has no other first-dollar coverage) may establish an HSA.”

“HSAs are an amazing tool,” says Sharon K. Weaver, President of Mission Financial Planning, Inc. in Mission, Kansas. “We frequently recommend that our clients choose health insurance that qualifies them or their employees to use an HSA account. HSAs can be used to provide pre-tax dollars for current medical expenses as well as future medical insurance and expenses. When used for medical expenses (now or in the future), an HSA is triple tax advantaged (tax deductible, grows tax deferred, and comes out tax free).”

Greg Szymanski of Geonerco Management in Seattle, Washington sees three primary advantages of using HSAs in conjunction with 401k plans: “1) Reduce taxable income; 2)Increase self-reliance in retirement years; and, 3) Compounding – growth inside of these tax favored accounts over time.”

Despite these advantages, the data provided by Chiricotti suggests people don’t understand HSAs. Health insurance in general is confusing. Consumers look at traditional HMOs and PPOs and don’t think there are any alternatives. “I am constantly baffled by plans that are HSA eligible with no HSA in place,” says Sean Moore, President of SMART College Funding in Boca Raton, Florida. “Many people are still unaware of what an HSA is, or assume it is the same as a Flexible Spending Account (FSA). I think as costs continue to rise and larger deductible plans become the norm, people will become more aware of options to use pre-tax dollars on medical expenses. I truly think we will see a surge in HSA plans in the coming years.”

The high deductible health plan (HDHP) requirement can be a significant barrier. “The trade-off is that the enrolling individual must elect an HDHP that exposes them to higher out-of-pocket liability,” says Jeff Motske, President/CEO of Trilogy Financial Services in Huntington Beach, California. “In addition, insurance companies often increase that exposure inside of their available plans. The result is that consumers become concerned with the initial exposure and elect a plan with less out-of-pocket costs. In order to increase enrollment, companies must invest in education and communication. Working with a good firm that produces easy-to-read material is an important partner.”

Scott Stratton, President of Good Life Wealth Management in Dallas, Texas, says, “The HSA is a great tool if you are a natural saver. The benefit for participants is that you get a valuable tax deduction for contributions and lower insurance premiums with a HDHP. If you don’t use the funds this year, that’s okay, because you have set aside money for future health expenses, which are inevitable really. There are still a lot of people who don’t understand how an HSA works, or confuse the HSA with a FSA, where they will lose their contributions if they don’t use them by the end of the year. I try to tell as many people as I can about the HSA, because there are a lot of folks who would benefit from one.”

With these advantages in mind, many plan sponsors might be wondering if their company is an ideal candidate for an HSA. “Nearly every company can benefit from this type of plan,” says Steve Christenson, Executive Vice President of Ascensus in Brainerd, Minnesota. “Larger companies have an ability to continue to offer a strong health option to their employees and also control costs. This paired offering can be provided by itself or as an option to other PPO or HMO type plans. Smaller companies (including sole proprietors), who may not have been able to provide an affordable PPO or HMO plan for themselves and/or their employees, can now create a more affordable offering when combining an HSA with an HDHP.”

If HSAs really represent an expanding prospect for additional benefits for employees, then those responsible for helping plan sponsors discover this break might stand to gain. “This is an opportunity for retirement plan advisors to showcase their skill and knowledge with plan sponsors in order to retain existing plans and win new business. Advisors that ignore this area risk becoming less relevant,” says Todd Kading, Managing Director at LeafHouse Financial Advisors, LLC in Austin, Texas. “Also, the HSA market is a source of investment assets that will require the skills and governance already offered by the top talents in the plan advisory space.”

There’s always talk about retirement savings plans, but HSAs represent a great opportunity to solve the issue of high cost medical expenses retirees potentially may face.

Interested in learning more about issues facing today’s 401k investors and how professionals advise them? Check out Mr. Carosa’s upcoming book Hey! What’s My Number?, available later this summer.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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