Benefits October 28, 2020

The Critical Role of HSAs in Helping People Prepare for Retirement

Experts say it is important to encourage health savings account holders to invest their money, as doing so increases their balances four-fold.

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During the 2020 PLANSPONSOR HSA Conference, Nancy Emerson, vice president, health solutions thought leadership, Fidelity, said the first step in helping people better prepare for health care expenses in retirement is to help them “understand the health care benefits they are enrolled in.”

Emerson also said financial and health considerations are intertwined. “We believe health care plays a big role in someone’s financial wellness.”

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To help improve financial wellness, Emerson said in the session, which was sponsored by Fidelity, Fidelity has been offering health savings accounts (HSAs) for the past 10 years. She said Fidelity believes that the first step in helping people improve their outlook when it comes to health care expenses is to teach them to “shop for health care services the way they do for other things. Confident consumers make better health care decisions, and this can help bring costs down, and controlling health care costs means a greater likelihood of people attaining financial security.”

Next, it is important to teach people about healthy behaviors and preventative care, she said.

If someone opens an HSA, they should be able to take care of health care expenses as they come in, Emerson said.

Three ways people can do a better job of preparing for health care costs in retirement are by opening an HSA, taking out long-term care insurance and educating themselves about medical costs in retirement.

To that last point, William Applegate, vice president, industry relations, Fidelity Health Solutions, said Fidelity estimates that a single person retiring today at age 65 will need $150,000 to cover health care costs in retirement, and a 65-year-old couple retiring today can expect to spend $295,000 on health care throughout their retirement.

Applegate said that while it is important to educate people about these costs, it is also important to prevent them from getting “sticker shock, because that leads to inertia and they don’t do anything to prepare. These are big, scary numbers—no question. The most important thing is to help drive smarter choices during open enrollment and to educate them about the important role that HSAs can play in helping them prepare.”

Applegate noted that people who own HSAs have generally taken the time to become more knowledgeable about health care costs in retirement, and those who save for both retirement and health care costs through an HSA are more confident about their personal finances, are more confident about achieving their financial goals and believe they will have enough savings by the time they want to retire, Applegate said.

It’s up to plan sponsors and advisers to educate workers that HSA balances can roll over from year to year, can be invested, have a triple tax advantage and can be withdrawn for nonqualified expenses after age 65, he said. As it stands, Applegate said, “38% of people think you use the money or lose the money at the end of the year, 54% don’t know the assets can be invested, 33% don’t know about the triple tax advantage and 46% don’t know about the leniency of the use of the money in retirement.”

Applegate noted that a third of people in the U.S. are carrying some form of medical debt, and 31% of hardship withdrawals from defined contribution (DC) plans are to cover health expenses.

Applegate said the best way to get people to open an HSA is to integrate education about the accounts with retirement savings and to make investing the assets in the HSA automatic. “People who invest their HSA savings have balances that are four times higher than those who do not invest, at every step of the way,” Applegate said.

Applegate also said that people who have both an HSA and a retirement account have a total of $216,000 in savings, versus $114,000 if they only have a retirement account. People with both are deferring an average of 10.6% of their salary, versus 6.7% for those with just a retirement account, he said.

Compliance October 28, 2020

Examining Trump and Biden’s Plans on Social Security, 401(k)s and Taxes

The two candidates differ in their approaches to several key areas of importance in the retirement planning industry.

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With the presidential election days away, American workers are casting their ballots and researching the policies each candidate has introduced and supported, including their proposals on Social Security and 401(k) and tax reform.

Social Security

The Trump administration has remained tight-lipped about plans to reform Social Security taxes and benefits. Aside from President Donald Trump’s executive order on payroll tax deferrals in August, the president hasn’t offered specific plans on how his administration would handle Social Security and its potential future uncertainty. In early August, Trump called for forgiveness on the employee payroll tax deferrals he approved from September 1 through December 31. Leading up to the Republican National Convention in August, the Trump administration released a set of vague proposals, one being to “protect Social Security and Medicare.”

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John Lowell, an Atlanta-based partner at October Three Consulting, says he expects that if Trump is re-elected in November, the country will see many of the same current policies. “The Trump administration, thus far, has really not had a focus on retirement policy, as has frequently been the case,” he says.

Democratic nominee and former Vice President Joe Biden, on the other hand, has revealed plans to reinforce Social Security. In his proposals, Biden says he would expand Social Security and impose additional taxes to pay for the benefits. Currently, American workers pay Social Security taxes on the first $137,000 of wages. Biden’s plan would reimpose a 12.4% Social Security payroll tax for earners who gross more than $400,000 a year.

“It would almost be a surtax and not count on additional wages throughout the year,” says Jeffrey Levine, director of advanced planning at Buckingham Strategic Wealth in Long Island, New York. “It would not boost benefits for those individuals; it would effectively cost them more. That’s how a lot of this would ultimately be paid for.”

Levine says Biden has another proposal that would increase benefits for retirees who have collected Social Security for 20 years or longer. “While Social Security does receive cost-of-living adjustments [COLA], you can talk to any Social Security beneficiary, and they’ll tell you that they haven’t seen their checks increase in line with what their expenses have over in the last decade, as expenses have gone up so much more than Social Security benefits have,” he adds.

401(k) and Tax Reform

While Trump has yet to release details on second-term tax plans, the president has said he wants to pass a second economic relief package should he be re-elected. It’s unclear if there would be a second stimulus check for many Americans in the package or how much the check would be.

In the August agenda, the Trump administration said it wanted to enact “‘Made in America’ tax credits,” and cut taxes to “boost take-home pay and keep jobs in America,” if Trump is re-elected.

In Biden’s Emergency Action Plan to Save the Economy proposal, the candidate proposes another round of stimulus checks, but does not specify how much each check would offer.   

Lowell says Biden’s multiple proposals for tax restructuring include a potential nationwide retirement plan. Biden’s plan would offer tax credits for small businesses to help cover the costs.

“Part of Biden’s platform is that he wants availability of 401(k) or a plan that looks like a 401(k) to be automatic,” explains Lowell. “If you’re in the workforce, either your employer will offer you a 401(k), or if your employer doesn’t offer you one, there will be some sort of governmental plan.”

Lowell likens the proposal to a retirement version of the Patient Protection and Affordable Care Act (ACA) enacted under the Obama administration in 2010, in which employers could still offer health care plans as long as they met minimum criteria, despite the creation of a public option. “If you look at the way the ACA played out, employers still had the opportunity to continue offering health plans, so long as they met these standards,” he says. “They had mandatory types of coverage, maternity care, certain pediatric coverages, etc.

“With the Biden 401(k) proposal, if the employer didn’t offer some minimum, so for example something like dollar-for-dollar match, then your employees would have the right to opt in to a national plan,” Lowell continues.

Lowell predicts the national plan would be funded in one of three ways: enacting tax increases, cutting some existing policy or mandating employers that do not offer a 401(k) plan to chip in.

Other proposals in Biden’s tax policy include increasing the top corporate tax rate from 21% to 28%; creating a new minimum tax on corporations with “book profits” in excess of $100 million; taxing capital gains and qualified dividends at the ordinary income tax rate for those who make more than $1 million in income; restoring the Pease limitation, which capped the value of itemized deductions for taxpayers; and shifting 401(k) deferrals from an income deduction to a tax credit.

The last proposal would convert deductible contributions to a 26% refundable tax credit for each $1 contributed in a 401(k), individual retirement account (IRA) or other traditional retirement vehicles. This tax credit would be listed as a matching contribution in a participant’s retirement account. Aside from simplifying complexities for participants, the proposal aims to incentivize lower-paid workers to save money for retirement.

Lowell offers an example of the proposal’s benefits: “If a worker is currently in the 10% tax bracket and is saving $5,000, then that’s worth $500. It’s only worth $500 to the extent that there is a tax bill. If this became a refundable tax credit, then that $500 becomes worth $1,000 or more.”

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