Tear Down the Silos Between HSAs and 401(k)s

Health care and retirement savings are two sides of the same coin

By Stephen Miller, CEBS Jun 19, 2017
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It's time for health savings accounts (HSAs) and 401(k)s to get better acquainted. Consigning them to separate silos isn't helping employees save for retirement, which is costing employers a bundle of money.

"Increasing numbers of employees are postponing retirement, many driven by financial necessity," said Kevin Mahoney, senior institutional consultant at The Mahoney Group of Raymond James, a financial advisory firm in West Nyack, N.Y.

While older workers who love their jobs tend to be engaged and productive, "those who are still working solely because they can't afford to retire tend to be less healthy, highly stressed and disengaged from their jobs," Mahoney said during his concurrent session at the SHRM 2017 Annual Conference & Exposition. "The ones who don't want to be there are the ones you don't want to keep."

Delayed retirements also impede advancement opportunities for younger employees, who may leave for greener pastures.

"It's time to rethink our approach to retirement and health benefits because what we have doesn't work the way we need it to," he explained. The separation of HSAs and 401(k)s is at the heart of the problem.

Maximizing HSAs

"Saving in an HSA is probably the best approach a young employee can take " in terms of growing retirement savings, Mahoney said. That's because the tax advantages of HSA savings and investing outweigh those of a 401(k).

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HSAs have triple tax advantages. While funds contributed to either an HSA or a traditional 401(k) are excluded from income taxes, HSA contributions, up to annual limits, are also excluded from FICA and FUTA  payroll taxes. In addition, funds can be withdrawn from an HSA on a tax-fee basis to pay for health care expenses.

"Many people don't realize that if you save your health care receipts in a file today, then during retirement you can withdraw HSA funds tax-free against those years-old receipts," which can turn the HSAs into a fund to pay for more than just future health care expenses.

These advantages lead to a startling idea: "HSA savings is probably the best approach a young employee can take, so contributing to an HSA up to the limit—even before contributing to a 401(k)—makes sense," Mahoney said.

It can also be in employees' long-term interests not to pay for routine health care expenses using an HSA, in order to let those funds build up. For these expenses, "spend money out of cash flow today when you have it, and then take the money out in retirement," he advised.

Too many HSA holders also don't realize they can invest HSA funds in mutual funds, just as they do with a 401(k), Mahoney noted. "Employers need to provide general guidance to employees on how and why to save and invest through an HSA." Some 401(k) record-keeping firms also administer HSAs, allowing both to share the same or similar investment fund menus.

Employees in their 20s and 30s who typically have limited health care expenses tend to be better off with a high-deductible health plan (HDHP) coupled with an HSA, as HDHPs have lower premiums than traditional plans. In addition, high-earners who don't need to use their paychecks to pay for routine health care costs can take full advantage of HSAs for long-term saving and investing.

HSAs are owned by individual account holders and are not group plans governed by the Employee Retirement Income Security Act (ERISA). However, the Department of Labor's new fiduciary standard rule applies to HSAs (as it does to non-ERISA individual retirement accounts), so employers who facilitate HSA access for their employees and administer salary-deferred contributions should select an HSA vendor with competitive and reasonable fees, Mahoney said.

Maximizing 401(k)s

401(k)s, the primary retirement vehicle for most employees, aren't being used to their best advantage, Mahoney said.

"We know that automatic enrollment and annual automatic escalation to increase employees' deferral savings rates, with an opt-out option, boosts long-term savings even more than an employer-match increase, but many employers are still hesitant to incorporate auto features into their 401(k) plans," he said.

A 2016 Arthur J. Gallagher & Co. study found that 43 percent of employers have implemented auto enrollment, while just 29 percent have adopted auto escalation.

Sometimes employers say their employees don't want these automatic features, "but when they are put in place, the opt-out rates are near zero," Mahoney pointed out. Sometimes employers say that increasing plan participation will drive up the employer's matching-contribution costs, "but there are ways to tweak the match formula so that this doesn't happen," he noted.

Even if the match formula can't be adjusted and that expense goes up, "in the long run, employers still save money" because employees who can't afford to retire drive up other costs far in excess of the extra match spending.

Check your health care data and workforce demographics, he suggested. For instance, annual health care costs for a new hire at age 38 could be $4,870 per year, while health care for a 65-year-old could be $11,219, as data from a study by insurer MassMutual suggests. Workers' compensation costs also are considerably higher for older workers. Add to the mix higher wages typically earned by employees in their 60s versus new hires in their 20s or 30s, and the cost of delayed retirements makes the expense of increased spending on a 401(k) match seem puny.

Workers who "aren't healthy and aren't productive are costing you lots of money," Mahoney noted. "When employers tell me they can't afford the added match dollars related to auto enroll and auto escalation, my response is, 'Really? You can't afford not to do this.' "

Mahoney suggests adopting auto enrollment with an annual auto increase up to at least 10 percent of an employee's paycheck, "or until the employee 'cries uncle.' "

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

A Package Deal

Employees need information to make realistic projections, Mahoney said. For example, even $1 million in retirement savings will only produce $40,000 a year if put into an annuity at current rates. Meanwhile, projected health care costs in retirement could reach as much as $400,000 for a couple who retires at age 65, a 2016 Bank of America/Merrill Lynch report showed.

During open enrollment, 401(k) plans are often ignored altogether, Mahoney said, while employees are asked to select a health plan and, as part of that process, to choose whether to participate in an HSA and set annual HSA contributions.

"This is the time to present HSAs as a supplemental retirement plan that works together with employees' 401(k)s," Mahoney said.


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