Why More Companies Are Supplementing 401(k)s With HSAs
A growing number of employers have recognized that a combination of HSAs and 401(k) plans may improve both the company’s overall benefits program and employee well-being. However, too many employers and their employees are missing out on this triple tax-advantaged savings plan – to the tune of an average of $119,000 in retirement savings, according to Fidelity Investments research. Ignorance and misconceptions conspire to make HSAs not as ubiquitous as they should be.
Many have already jumped on the HSA bandwagon
Fidelity Investments, one of the largest 401(k) record keeper, has seen tremendous growth in the HSA space, with a 50 percent increase in HSA assets so far in 2018. One-quarter of employees who are offered HSAs utilize them. The total number of HSAs nationwide increased 329 percent from 2011 to 2017, and total funds deposited reached $45.2 billion as of December 2017. The monies deposited figure is projected to reach $64 billion by the end of 2019.
According to Eric Dowley at Fidelity, “With more than half of Americans naming rising health care costs as a top financial concern, this increased adoption of HSAs shows an encouraging trend that more people are making health care savings a priority.”
Companies and their workers are missing out
Why haven’t more employees joined in the HSA boon? Employee ignorance may explain why they aren’t clamoring for access to HSAs or even using them when available. Lack of awareness of how an HSA works and its myriad of benefits likely are preventing a surplus of companies from offering them. Many employers also have misconceptions about HSAs and how they may be able to enhance a company’s 401(k) plan to bolster their overall benefits program.
What is an HSA and why employees should want one
To combat the burdensome costs of health care, which is exacerbated as workers age and eventually retire, employees need all the help they can get. HSAs enable individuals covered by a High Deductible Health Plan (HDHP) to set aside money on a pre-tax basis in a special account to pay for certain health care costs. HSAs operate as a triple tax-advantaged savings account:
- Contributions are tax-deductible, or if made through a payroll deduction, treated on a pre-tax basis.
- Money invested has the potential to grow tax-free.
- Employees may make tax-free withdrawals for qualified medical expenses.
HSAs give employees adaptable spending models based on their varying needs. These funds can be used toward deductibles, copayments, coinsurance, prescription drugs and out-of-network provider visits for eligible medical, dental and vision needs. Employees with HDHPs also are legally protected for their maximum out of pocket expenses.
However, such benefits are only valuable if they are realized and understood. According to one report, only 51 percent of Americans consider themselves knowledgeable about HSAs. Many Americans have no clue that they can use their HSA assets accumulated while they work for health care expenses they’ll inevitably incur after they retire. That same study finds that an alarming 40 percent of Americans surveyed presume that all HSA funds must be used by year’s end. Such myths explain why so many employees are leaving considerable retirement dollars on the table.
What’s good for the employee is also good for the employer
Employees hardly hold a monopoly on confusion and ignorance with regard to HSAs; employers have a hearty share as well. Too many are unaware that the most significant benefit afforded by an HSA is tax savings, which can be applied to other outlets. Nor do they recognize the significant non-tax benefits as well.
When an employee makes an HSA contribution, no payroll taxes are paid on that amount, lowering FICA and unemployment tax liability for both employee and company. There also is a federal income tax deduction for contributions made into an HSA account. HSA-qualified plans also tend to have lower monthly premiums than other plans.
Non-tax-related advantages for employers include that for an HSA, the employee is the sole account holder, unlike for a Flexible Spending Account (FSA) or a 401(k). Thus, employers don’t need to manage expenses for their employees. Another benefit is that employers can provide their employees a more lucrative overall benefits package in the long run for the simple reason that, unlike an HSA’s contributions, money invested in a 401(k) plan is taxed upon withdrawal.
The federal government, through its tax laws, genuinely wants to help individuals finance the skyrocketing costs of health care. They incentivize employers to offer HSAs and employees to take advantage of them when offered. To miss out on this valuable opportunity, whether due to lack of knowledge or confusion, is disappointing. When used in tandem with a company’s 401(k) plan, HSAs allow a company to provide a benefits package that may improve their employees’ health care cost management while augmenting their retirement savings. Many have accepted this opportunity; many more likely will.
This information is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
Brian Menickella is a co-founder and managing partner of The Beacon Group of Companies, a broad-based financial services firm based in King of Prussia, Pa.