The HSA in Your Future: Defined Contribution Retiree Medical Coverage - Part 1

How Did We Get Here? - The First of Three Posts

If America could get to the moon 48 years ago, it makes me wonder – if we accomplished that so long ago, what can stand in our way today??

Since then, benefits professionals have experienced lots of legislative challenges and opportunities – I call them the alphabets …  ERISA, ERTA, TEFRA, TRA’86, COBRA, EGTRRA, PPA, PPACA, etc.  We have also seen lots of changes in how we account for benefits, FAS 87, FAS 106, FAS 112, FAS 158, etc.

Perhaps unintentionally, these legislative and accounting changes triggered a major shift by reducing the attractiveness of defined benefit pension plans and defined benefit retiree medical programs. 

Perhaps also unintentionally, new tax preferences favored “defined contribution” formats.  The Revenue Act of 1978 added IRC §401(k) savings plans and IRC §125 cafeteria plans.  I say unintentionally, because few who read this post know that §401(k) plans were added to discourage tax favored saving.  And, few know that the Joint Committee on Taxation then scored both of these provisions as inconsequential – expecting that they would be so infrequently used they would have no effect on the federal budget:  

• IRC §401(k):  “Revenue effect:  This provision will have a negligible effect upon budget receipts.”
• IRC §125:  “Revenue effect:  This provision will have no effect upon budget receipts.”

Of course, today, these are two of the five largest “tax preferences” in the federal, state, Social Security, and Medicare budgets.    

Similarly, the Medicare Modernization Act of 2003 expanded access to Health Savings Accounts (HSAs).  However, Congress scaled back its initial HSA proposal so that the estimated 10-year budget impact was reduced to $6 Billion.  But …  according to the November 11, 2015 report issued by the Office of Tax Analysis, US Department of Treasury, MSA/HSA “tax expenditures” were estimated as $6.8B in federal fiscal year 2017 alone.  They are projected at $169+B for the 10-year budget window (2017 – 2026)! (See:  https://www.treasury.gov/resource-center/tax-policy/Documents/Tax-Expenditures-FY2018.pdf)

When I was called upon in 2004 to help evaluate health savings account (HSA) business opportunities, I predicted: “Twenty-five years ago, no one had ever heard of 401(k); 25 years from now, everyone will have an HSA.”  I authored a detailed analysis of one Fortune 100 employer’s transition from defined benefit retiree medical – first to a defined dollar basis, then to a defined contribution basis - lowering benefits expenses by embracing HSAs as a savings and investment vehicle.  See:  http://www.ifebp.org/inforequest/ifebp/0200386.pdf.  With all the talk about America’s retirement crisis and inadequate preparation, it is a wonder that most plan sponsors haven’t taken similar action.

In the last two posts on this topic, I will detail the real retirement coverage and preparation crisis and how plan sponsors can resolve it.  You can do it!