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Value: The HSA In Your Future: Defined Contribution Retiree Medical – Part 3 of 3

06/13/2018
By Jack Towarnicky

As part three of a series focused on the H.S.A. drawn from my presentations at the World at Work, Total Rewards Conference, today’s post is the last in that series.  The prior posts can be found here and here.

The HSA is A Uniquely Powerful Retirement Savings Tool
The HSA is powerful when plan sponsors and workers leverage its unique capabilities1:

  • Tax deductible contributions to facilitate savings; 
  • Tax free distributions for qualifying medical expenses incurred after the date the HSAs is established, whether or not employment has continued and whether or not HSA-qualifying health coverage remains in place;
  • Taxable distributions for non-medical purposes at the election of the worker, at any time. 

These capabilities, as well as the expanded list of qualifying medical expenses, make the HSA a powerful tool for financing post-employment medical expenses.  Medical expenses that qualify for tax free treatment for HSA assets include:

  • The same expenses that qualify under a Medical Flexible Spending Account (FSA) which includes most medical, dental, hearing, and vision out-of-pocket expenses

PLUS

  • Reimbursements for “retiree” medical expenses which do not qualify under a FSA:
    - Qualifying Long Term Care Premiums
    - Long Term Care Out of Pocket Expenses
    - Medicare Part A, Part B and Part D Premiums
    - Employer-sponsored Medigap Premiums

Unlike a traditional 401(k), 403(b) or IRA, there is no “Required Minimum Distribution” for HSA assets – so, investments can continue to accumulate tax deferred until distributed. There is no requirement that HSA monies be used in the current year, no “use or lose” each year, or ever.  

And, while medical expenses in retirement are not as certain as death and taxes, they are all but certain3. But, should workers be lucky enough to avoid significant medical expenses and die prior to exhausting the account, a surviving spouse can continue the HSAs in his/her own name. If the worker names a beneficiary other than a spouse, the HSA monies are distributed to the beneficiary as taxable amounts in the year the worker dies. 

Use the HSA in Combination With a 401(k), 403(b), and/or IRA
While the HSA is a valuable tool, plan sponsors should design their rewards programs so that workers are likely to maximize the tax preferences and employer support from all plans – including employer-sponsored retirement savings plans. Like individual account retirement savings plans, such as a 401(k) or 403(b), HSA value is maximized by making contributions and investing them at as early an age as possible, invested for an extended period of time, where expenses are claimed as late as possible.  Just how valuable?  Here is an example4

No, that isn’t a misprint, 60% more valuable than the same amount of take home pay invested in a 401(k).  The differences:

  • In contributions, result from avoiding FICA and FICA-Med taxes, and 
  • In payout, result from avoiding federal and state income taxes. 

Value Maximization
To maximize the value workers receive, in addition to encouraging saving and investing in the HSA, plan sponsors should also offer a retiree-pay-all, insured, Medicare Supplement coverage option.  

In today’s challenging global competitive cost environment, few employers have the resources to add a new benefit plan.  Conversely, public and private employers who already offer retiree medical coverage are searching for cost reducing alternatives.  For private employers, it is all about efficiency.  For public employers, retirement benefits are in clear conflict with other public priorities – education, Medicaid, infrastructure, etc.  

Either as a new benefit or as a cost-reducing alternative, America may see noteworthy growth in a different type of retiree medical – particularly among employers who do not offer retiree medical coverage today.  Yes, the next employee benefits innovation may be a “back to the future” addition of retiree-pay-all, insured, Medicare Supplement coverage, perhaps through an exchange – where that strategy reduces current day expense and provides access to coverage that has the potential of:

  • Reducing current employer and worker costs for health coverage, 
  • Reducing post-employment health costs for workers, while 
  • Reducing the risk of and the costs associated with delayed retirement.  Note:  

The Securities and Exchange Commission’s (SEC)’s Office of Investor Education and Advocacy has issued an Investor Bulletin regarding HSAs.


1IRS Publication 969 
2Only premiums for employer-sponsored Medicare Supplement/Medigap/Medicare Advantage policies - does not include premium for private/individual Medigap policies
3Fronstin, Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $370,000, Up from $350,000 in 2016, EBRI, 12/20/17, Accessed 5/28/18 at:  https://www.ebri.org/pdf/notespdf/EBRI_Notes_v38no10_22.pdf; See also Fidelity Viewpoints:  How to plan for rising health care costs:  Tab for your health care post-age 65? Try $280,000 for the average couple, 4/18/18, Accessed at:  https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs  However, note that the Fidelity number is an “average” (including those with significant medical expenses) while the EBRI number is an “up to” estimate.  So, both numbers likely overstate the median level of expenses a retiree may incur.  For comparison, see: Banerjee, Cumulative Out-of-Pocket Health Care Expenses After the Age of 70, EBRI, 4/18/18, Accessed 5/28/18 at: https://www.ebri.org/pdf/briefspdf/EBRI_IB_446.pdf That analysis incorporates results from a recent Health and Retirement Study (HRS) where 95% of those who died at age 95 or older said they paid less than $269,000 in out of pocket costs, and the median was reported as $27,000.  However, the study only included out-of-pocket expenses - excluding insurance premiums for Medicare Part B, Part D and Medicare supplement policies.  Importantly, those age 95+ reached age 65 in 1988 or earlier, back when the Medicare Part A deductible was $540 (today it is nearly three times that amount, $1,340).  Assuming the same kind of medical inflation over the next 30 years, the Medicare Part A deductible will likely exceed $3,500 when a worker who is age 30 today becomes Medicare eligible at age 65 in 2048. So, while Fidelity and EBRI estimates may or may not overstate the issue for the majority of future retirees, a worker age 30 today will likely need to accumulate an amount well into six figures to fund her post-employment medical expenses.  With aggressive and continuous Health Savings Account participation, she can minimize the impact on her current take home pay while maximizing her savings and the tax preferences she can qualify for.
4 Author's calculations

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