It’s never too early for plan sponsors to incorporate the most effective strategies for addressing today’s healthcare inflation and economic challenges.
To alleviate “financial fragility” when it comes to the medical expenses that their participants are not prepared to pay, a Health Savings Account (HSA) strategy is capable of “Quadruple Duty” – covering Medicare premiums, out-of-pocket medical costs in current and future years, while also providing for retirement income and survivor benefits.
HSA assets receive America’s most valuable benefits tax preference since contributions are pre-tax for federal income tax purposes, as well as most state income taxes FICA (Social Security) and FICA-MED (Medicare). Earnings accumulate tax deferred and payouts for eligible medical expenses that are tax free.
More medical expenses qualify under HSAs than under health Flexible Spending Accounts (FSAs). Unlike FSA accounts, there is no “use or lose” or forfeiture provisions. Unspent money rolls over from year-to-year.
HSAs and 401ks — Better Together
People who save in both an HSA and a 401k can achieve a superior, synergistic outcome, one that is dramatically better than participation limited to only one of the two accounts. Superior HSA designs avoid risks of commission and omission, and HSA-capable coverage will complement a 401k plan, in both the accumulation and decumulation phases.
A participant who carefully allocates savings between the two benefits can shape how each is used, today and tomorrow, maximizing the net after-tax value achieved from savings.
- Leveraging features that are superior in each plan
- Meeting short-term, intermediate, and long term needs along the way to and throughout
HSA and 401k, better together, create a unique engagement lever. To ensure workers receive the full employer financial support, a plan sponsor will want to:
- Update 401k plan liquidity provisions to allow for multiple loans, electronic banking, and to enable borrowing as soon as practical
- Immediately vest at least some of the employer financial support to the 401k plan (employer contributions to HSAs are always 100% immediately vested)
- Change the employer match process (401k and HSA, as appropriate) to include a “true-up” each pay period
- Make a $1 employer contribution on the first day of HSA-capable coverage to start the HSA claims clock for eligible expenses
- Auto enroll the worker in the 401k and HSA at contribution rates sufficient to qualify for the maximum employer financial support (match).
Much depends on specific plan provisions, employer contributions, etc. Remember that HSA employee contributions, similar to 401k contributions in most plans, can be prospectively changed during the year—increased, reduced, stopped and (re)started. And, like 401k plans, plan sponsors can (re) enroll, or auto-escalate HSA contributions. Importantly, financially fragile workers may need to leverage the 401k’s tax-preferred liquidity to fund the HSA.
Plan sponsors can remove any barriers that would impede workers from maximizing the value from both the HSA and 401k by:
- Using the above changes, coupled with some savvy default provisions, to accommodate the needs of the financially fragile, and
- Adopt HSA-capable coverage starting December 1, 2022 (not January 1, 2023) to maximize tax-preferred retirement savings.