Data and Research March 13, 2018

Confusion About HSAs Remains Default Employee Position

A new survey shows many Americans are flatly unaware that they can use their health savings account assets accumulated in their working years to pay for health care and long-term care expenses in retirement—believing erroneously the money must be spent or be forfeited each year.

Reported by

A new joint report by the LIMRA Secure Retirement Institute and Insured Retirement Institute (IRI) finds only 51% of Americans believe they are knowledgeable about health savings accounts (HSAs).

And as is often the case in life, it seems that those people who feel confident in their knowledge on the subject actually have some trouble demonstrating their supposed prowess. As LIMRA SRI and IRI explain, the study surveyed consumers, financial advisers, asset managers, and employers to get a complete understanding of the HSA market and how this product is being used.

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“The survey results indicate there is much to be done to educate consumers, advisers and employers to ensure the full benefits of HSAs are realized,” researchers warn.

The survey shows many Americans are flatly unaware that they can use their HSA assets accumulated in their working years to pay for health care and long-term care expenses in retirement.

“In fact, two in five Americans mistakenly believe that balances must be spent by the end of the year, or be forfeited,” researchers warn. “The growing costs of health care and long-term care have prompted many advisers to address these risks with their clients as they plan for retirement. Nine in 10 advisers surveyed say they typically discuss healthcare or long-term care with clients, but only seven in 10 have specifically addressed the use of an HSA.”

Importantly, LIMRA SRI and IRI find those who do not discuss HSAs acknowledge they have insufficient expertise with HSAs. Nearly all advisers and employers surveyed say they would like to learn more.

“Today, only a quarter of Americans plan to use HSA assets to fund future health care costs in retirement,” says Judy Zaiken, corporate vice president and project director at the LIMRA Secure Retirement Institute. “The findings underscore a great opportunity for the industry to educate consumers and advisers on the value of using HSAs for tax-free asset growth and as a financial hedge against retirement health care costs, which is still an uncommon strategy.”

IRI President and CEO Cathy Weatherford adds that her organization “values the opportunity to collaborate with LIMRA Secure Retirement Institute to examine this growing aspect of holistic retirement planning.”

“As the onus of providing income during retirement is increasingly the responsibility of the individual, it is critical for the retirement income industry to drive consumer education on the value of participating in an HSA,” she argues. “While the need for more education is clear, it is encouraging to see the continued growth of HSAs over the past decade and the increasing number of employers offering and seeking avenues to offer these accounts in their benefit packages.”

As the researchers explain, the study found there were some groups of consumers that are more likely to be knowledgeable about HSAs than others. Wealthier households especially are more likely to be knowledgeable about HSAs. Among households with $100,000 or more in financial assets, 65% are knowledgeable, as compared to just 40% of those with less wealth.

Men are somewhat more likely than women to report being knowledgeable about HSAs (58% percent of men versus 48% of women are somewhat or very familiar). Similarly, married workers report more HSA knowledge than do non-married workers (69% versus 52%). Consumers with children report more HSA knowledge than those without children (55% versus 44%).

More LIMRA SRI information and research is available here.

Ask the Experts March 13, 2018

(b)lines Ask the Experts – Refresher on Correcting 402(g) Excess Deferrals

“My plan needs to correct some 402(g) excess deferrals for the 2017 plan year. In looking at some old Ask the Experts columns, I stumbled upon an old Q&A in this regard, but was wondering if the information is still current.”
Reported by

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

 

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This is a timely question, since the deadline for correction of a 402(g) excess deferral for 2017 is fast approaching. And indeed, the Experts have not addressed this issue since 2013. Although the correction principles have remained the same since that time, it would be appropriate for us to provide a refresher to our readers.

 

First, the plan’s recordkeeper should be notified of the amount of the excess deferral. The recordkeeper will then calculate the earnings attributable to the excess and issue a distribution to the participant in the amount of the excess, plus earnings (or less losses, if any). Since the recordkeeper must distribute the excess deferral by April 15, 2018, you should notify the recordkeeper immediately of the excess deferral. It is important that NO adjustments be made to the participant’s W-2 (i.e., the entire amount of the deferral, including the excess, should be reflected in Box 12 of the W-2).

 

You should also inform the participant immediately of the excess deferral amount as he/she will need to add the amount of the excess deferral to Line 7 (Wages, salaries, tips, etc.) of his/her 2017 1040 tax return.  Also note that the participant must file a 1040 tax return for 2017: he/she cannot file a 1040A or 1040EZ. Similar rules apply to the participant’s state income tax filing, with the exception of states that do not recognize an income tax exclusion for deferrals in the first place (e.g., New Jersey, where ALL 403(b) deferrals-but not 401(k) deferrals-are taxable as income).

 

As for the income attributable to the excess deferral, such income will be taxable in the year of distribution (2018 in this case). Although the IRS procedures are not specific in this regard, it is presumed that such income would be added to Line 7 of the 2018 1040 return (again, the participant must file a 1040). If a loss (rather than income) is attributed to the excess deferral, it is also reported on the participant’s 1040 for 2018, but there is a special reporting procedure. The loss amount is reported as a negative amount on Line 21 of the 2018 1040 (Other Income) and the type of income must be identified as a “Loss on Excess Deferral Distribution.”  

 

As for the official reporting of the transaction to the Internal Revenue Service (IRS), the recordkeeper will generally issue two 1099-R reporting forms in early 2019; one for the principal amount of the excess deferral (already declared by the participant as income in 2017) and one for the earnings attributable to the excess deferral (which the participant would report as income, as described above, on his/her 2018 1040 tax return). However, if a loss is incurred with regard to the excess deferral, only one 1099-R will be issued. 1099-Rs are for IRS reporting purposes only, and are NOT attached to tax returns.

 

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

 

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@strategic-i.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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