Benefits December 29, 2020

The Changing Attitude Toward HSAs

Considering the need for effective health care in 2020 due to COVID-19, health savings accounts took on new value.

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Health savings accounts (HSAs) have long been regarded as effective savings vehicles to pay for health care expenses in retirement, but the medical crisis of the COVID-19 pandemic has many employers rethinking HSAs for the future.

Refusing to Cut HSA Contributions

The coronavirus pandemic severely affected businesses and their employees alike, forcing some companies to lay off and furlough staff, eliminate bonuses and cut benefits. Experts warned employers of the potentially disastrous effect of cutting HSAs, such as compelling struggling participants to pay medical expenses out of pocket during a pandemic.

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“We asked brokers and employers what concerns most of their employees and clients have, and 54% answered they are concerned for the health of themselves and their family, which shows the immediacy of the situation,” said Alison Moore, vice president of marketing at HealthSavings, an HSA provider, in May.

Still, experts noted there was little data to suggest employers were stopping HSA contributions. Instead, Moore said, at least one of her clients was decreasing its 401(k) matches to avoid touching HSA contributions. Instead, the client was considering elevating contributions to HSAs. “They believe the HSA benefit offers more immediate relief for the current challenges,” Moore said.

Employing Loans to Fund HSA Contributions

The passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act raised questions about Small Business Administration (SBA) loans and the Paycheck Protection Program (PPP)—more specifically their relationship to HSA programs.

While Moore noted that SBA and PPP loans can help employers make contributions to employees’ HSAs, the emergence of new, lengthy CARES Act guidance was taxing for employers. Many found little clarification on the regulation and instead were warned of potential compliance issues should they make a mistake or an oversight. 

In an interview with PLANSPONSOR, Kevin Robertson, chief revenue officer at HSA Bank, an HSA administration provider, said employers may begin or increase HSA contributions for their employee population under SBA loans, but may not selectively contribute to just one or only some employees’ accounts. If it does, the employer can be subject to HSA comparability or nondiscrimination rules.

Under the CARES Act, rules on the PPP state that employers may use the money from these loans for payroll costs, and because the loans are intended for employees, plan sponsors may use them toward HSA features, said Moore.

Robertson still urged employers to tread carefully if applying such loans to HSAs, mainly because of limited understanding of the regulation.

Better Understanding of HSAs

To further familiarize employers with HSAs, industry experts reviewed rules and regulations on the accounts, in the 2020 PLANSPONSOR HSA Conference, presented online, in October.

Speakers discussed maximum contribution amounts for HSAs, limited to $3,550 for self-only coverage and $7,100 for a family this year. Those 55 and older could make a $1,000 catch-up contribution. As of 2020, the high-deductible health plan (HDHP) minimum deductible to trigger HSA eligibility is $1,400 for self-only coverage and $2,800 for family coverage, coupled with a maximum out-of-pocket limit of $6,900 for self-only coverage and $13,800 for family coverage.

The panel explained that individuals may make both pre-tax contributions through payroll deductions as well as after-tax contributions. They may also deduct from their income when filing tax returns. Another notable feature is that account holders may deduct from their own income the amount of HSA contributions made to their account by other people—but not the employer. Another favorable feature is that employer contributions are excluded from the employee’s income taxes.

The panel further noted that HSA funds may be used for other expenses, though penalties and taxes will apply in certain circumstances.

Retirement Plans and HSAs

Conference speakers also discussed the relationship between retirement plans and HSAs, noting how critical the savings accounts can be to an employee’s retirement.

In the short term, HSAs hold offer the benefit of complementing a medical plan, said Jeffrey Dorfman, managing principal of retirement practice at Qualified Plan Advisors. But, over time, the vehicles can help participants save money on qualified medical expenses in retirement.“We anticipate a merging of the conversation in which you no longer distinguish how you can help your employees in your 401(k) versus how you can help employees in [an] HSA,” he explained. “Most employees don’t look at their benefits package as six or seven features; they look at it as one.”

Steve Lindsay, senior vice president of relationship management at HealthEquity observed that 401(k) and HSA benefits complement each other, that instead of concentrating on one benefit offering, plan sponsors should provide a more holistic view of both.

A combination of these tactics can push HSA and 401(k) participation forward, Lindsay said. “We can drive a lot of behavior by helping them do the math and understand that this plan design creates wins for people,” he concluded.

Data and Research December 28, 2020

A Look at Innovative Ways Public Pensions Approach Funding

Some methods increase flexibility for individual employers.

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In a new report from the National Institute on Retirement Security (NIRS), “Beyond the ARC [Annual Required Contributions]: Innovative Funding Strategies From the Public Sector,” the organization looks at various ways public pension plans fund themselves.

The NIRS notes that the markets rebounded better this year after the COVID-19 pandemic hit than they did during the 2008 Great Recession. “However, there are concerns that cash-strapped governments will cut back on funding required contributions to public pension plans,” the institute says in the report.

The collection of funding actions that the report summarizes run the gamut—from implementing a wholesale funding strategy for a large statewide plan to more targeted reforms that simply increase participating employers’ control of how costs are paid over time. These innovative strategies extend well beyond the oft-cited annual required contributions or actuarially determined employer contribution (ADEC).

The first strategy is to develop separate funding methods for legacy costs and ongoing plans. The Indiana Public Retirement System (INPRS), for example, had continued to fund its legacy system on a pay-as-you-go basis, which the NIRS says is a low bar for funding purposes. The legacy system—the Teachers’ Retirement Fund (TRF)—was combined with the Public Employees’ Retirement Fund (PERF) in 2011 to create the INPRS.

“In short,” the report says, “the broader system is growing out of the consequences that stemmed from being late to move toward prefunding. Today, there are more people in the prefunded TRF tier than the pay-go tier. In summary, the financing plan essentially partitioned off the legacy tier, retained lower expectations for the pay-go tier, exceeded those expectations in a significant and systematic way, and bought time to correct a historic mistake.”

Kentucky used a fixed allocation of unfunded liabilities to mitigate risks. The proposal for the Kentucky Employees Retirement Systems (KERS) Non-Hazardous (NH) plan funding changes has not yet become law, but, the NIRS report says, “given that the proposal is insightful about diagnosing a key problem faced by the retirement system, it seemed appropriate to include this approach for its potential utility within our community.”

The KERS NH plan had been underfunded for many years. In 2013, the state legislature committed to begin funding it on an actuarially sound basis, resulting in employers reducing plan payroll by 33% between 2010 and 2020.

As of June 30, 2019, the KERS NH plan was only 13% funded.

To break the vicious cycle of rising rates leading actuarial calculations to be off-track, the Kentucky legislature proposed determining each employer’s share of unfunded liabilities as of that date, as a fixed dollar amount, and required employers to pay off those obligations over 27 years. “Essentially, unfunded liabilities are partitioned off and funded separately from the traditional percent of pay funding strategy that would still be utilized for new accruals,” the report says. “With this change, an employer’s share of unfunded liabilities is no longer driven by its share of the plan payroll.”

Yet another approach is enabling organizations to gain control over their retirement system with employer side accounts. “These efforts generally allow employers to prepay pension contributions into side accounts to reduce [the employer’s] future costs,” the institute wrote. “Those contributions are then managed for the employer, and various methods are used to determine how future costs will be reduced by these credits.”

The Oregon legislature authorized the use of side accounts in 2002 for its Public Employees Retirement System (PERS). The excess contributions may be used to reduce  contributions—the plan may amortize these funds over six, 10, 16 or 20 years.

The California Public Employees Retirement System (CalPERS) approach is to offer employers flexibility in managing pension costs, through a prepayment option. “Employers can submit pre-payments to CalPERS, with those funds being deposited into a Section 115 trust that is administered by CalPERS,” the NIRS wrote. Employers can choose between a lower-risk and a moderate-risk portfolio. “The prepaid contributions are not automatically amortized and used to reduce employer costs equally across future years,” the report says. “Instead, employers have flexibility regarding when to use these funds to reduce their pension contributions.”

New York State employers have the option to establish retirement contribution reserve funds to help stabilize their pension costs over time, and employers are permitted to establish and fund the fund accounts themselves.

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Pennsylvania is allowing its employers to prepay unfunded liabilities. They may make a one-time lump-sum payment of 75% to 100% of their respective unfunded accrued liability in exchange for reducing their future pension costs.

Then there are pension obligation bonds. “When pension bonds are issued, this typically results in a large sum of money invested in the markets at once,” the NIRS wrote. “This moves a pension fund away from its typical practice of dollar-cost averaging.”

Maine adopted a packet of broad reforms, including funding changes. Under the changes, the state will calculate the unfunded liability using the same assumptions it does for the ongoing funding of the plan. This means the plan will not recognize any gain or loss by the employer’s decision, similar to the practice used by multiemployer plans, according to the NIRS.

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