PSNC 2020: Considering Health Expenses in Retirement Planning

Speakers at the 2020 PLANSPONSOR National Conference made the case for health savings accounts (HSAs), noting that the products can assist with managing expenses and planning for retirement.

To start off the panel, attendees were asked whether they currently offer a high-deductible health plan (HDHP) with an added HSA feature in their plan design. Seventy percent answered yes, while 10% said no but that they are considering one, and 19% stated they do not and are not planning on adding one.

Will Applegate, vice president of industry relations at Fidelity Health Solutions, likened the HSA to a 401(k) plan. “To those who are currently offering an HSA, consider providing an employer contribution,” he said. “More employers are increasing matching formulas to work an HSA similarly to a 401(k).” Participants can reach their deferral limit in their defined contribution (DC) plan and add the remaining amount of their monthly savings to an HSA, Applegate added.

Incorporating an HSA option can have multiple benefits for plan participants, especially when it comes to taxes. The speakers emphasized that these accounts are triple tax-exempt and distributions are tax-free. For retirees, this can alleviate Medicare planning and costs, said Scott Thoma, principal of client needs research at Edward Jones. “To have an account that can be used to pay for most health care costs in retirement, tax-free, and use it to provide another avenue to keep premiums lower for Part B and Part D Medicare, it’s incredibly valuable,” he added.

It’s imperative that retirees associate HSAs as retirement savings vehicles, Thoma said. For example, in the off-chance occurrence that an HSA is overfunded, once a retiree reaches age 65, they can take distributions from the HSAs without facing a penalty. While retirees would still have to pay taxes on the distribution, the initial 20% penalty they would accrue before age 65 is gone. Because HSAs are a portable feature, they can be taken from one employer to the next. While participants can continue to have an HSA, they can only add new money if they are enrolled in an HDHP. “This is why we ask people if they want to work past age 65, because if they do sign up for Medicare past 65 years old, they can no longer contribute to an HSA,” Thoma explained.

Educating participants and retirees about Medicare is crucial to planning future costs, said Eva Kalivas, senior vice president of retirement and wealth management at EPIC Retirement Services Consulting LLC. She said research has shown that Medicare only covers 62% of all health care costs. Plan sponsors must educate their participants about what the service covers and what it does not. “Just like with Social Security education, Medicare needs to be spoken about with employees so they can understand it prior to using it,” she said.

Another benefit unfamiliar to most is the option of investing the HSA vehicle. According to research conducted by Fidelity, Applegate said customers who are investing their HSA have a balance that is, on average, four times higher than the balance of an HSA that hasn’t been invested. Employers can even use automatic investing if employees aren’t comfortable choosing their own path, he said. Kalivas noted that it is key to talk about asset allocation and risk tolerance when having one-on-ones with participants. In addition to investing, participants can use their HSAs for other medical-based needs many people might not know about, including in-home nursing care, meals while lodging in hospitals and even modifications to homes, such as handrails, grab bars, ramps, etc., Kalivas said.

Applegate highlighted a recent Plan Sponsor Council of America (PSCA) survey that indicated most employers see tax benefits of an HSA as a focus area for participants. Additionally, 61% of sponsors said employees need help understanding contribution limits. While 57% of employees believed they understood what HSAs are, they could not comprehend four basic attributes, including the tax benefits. Applegate noted that most participants may be discouraged by the term “high deductible” when it comes to HDHPs, so it’s worth reframing the description. “Language matters. Help them understand that lower premiums can offset the additional risk they’re taking on,” he said.

Thoma added that education among financial service professionals is integral as well. “Financial advisers need to understand these benefits to counsel clients and employers,” he explained. “The more we become educated better ourselves, the more we’ll help clients understand them.”

Plan sponsors looking for health care options could also consider nonqualified deferred compensation plans. When used properly, participants can apply a distribution schedule during retirement and use it as supplemental health care, Kalivas suggested.