Posted: 03.13.2008
Written by Steve Hettrick, Employee Benefit Specialist
By now, most employers have probably reviewed the options available for high deductible health plans and the Health Savings Accounts (HSA) that can be paired with them. However, despite the hype surrounding HSAs, relatively few employers have found them to be a realistic alternative because they shift significant exposure onto employees for out-of-pocket costs before the plan’s benefits begin paying claims. In fact, critics of HSAs have labeled them as being appropriate only for the healthy and the wealthy.
Although healthy and wealthy may not describe your employees, there may be segments for which an HSA would be a good fit. Included in this segment may be owners and other highly compensated employees. Highly compensated employees often have the financial resources available to pay the higher out-of-pocket costs associated with an HSA and may choose to allow their HSA funds to continue to grow untouched until retirement.
One of the primary advantages an HSA offers highly compensated individuals is the ability to set aside additional pre-tax dollars above and beyond the limits imposed on 401k contributions. And because funds taken from an HSA are free of tax whenever they are used for healthcare expenses, it may be appropriate to view an HSA as a “Healthcare 401k”.
Setting aside funds in an HSA for healthcare expenses after retirement is a solid financial planning strategy because any funds withdrawn from a typical 401k or IRA are taxed, regardless of the use of the funds. However, if funds are taken from an HSA for healthcare expenses, their tax-free status remains intact.
For example, if a person over age 65 withdrew $4,000 from a 401k or IRA, they might pay $1,000 or more in taxes even if the funds were used for qualified healthcare expenses. With an HSA these same funds would retain their tax free status and the full purchasing power of the $4,000 would be usable.
Furthermore, the dollars that are allocated into an HSA can be invested similar to a traditional 401k and over time they can accumulate significantly. For example, if a 45 year old married individual established an HSA now and contributed the maximum annual amount ($5,800 in 2008) every year, their account balance may exceed $250,000 by age 65. At age 65 if the investor feels that their HSA is over-funded in relation to their healthcare needs, funds can be withdrawn without penalty and taxed as ordinary income – just like a 401k or IRA.
Most insurance companies will allow employers to offer more than one medical plan to their employees, so it is often possible to offer an HSA for the highly compensated employees to choose alongside more traditional benefits. Contact any of the ALCOS benefits professionals if you’d like to learn more about HSAs and other creative plan design options.
Steve can be reached at 586.977.6300 or shettrick@alcos.com
