What the Health?
If you’ve been around the past few months, you’ve probably seen that health savings accounts (HSAs) are all the buzz in the retirement industry. But what’s the fuss?
Well, a major fear for adults is that they’re going to run out of money to pay for health care or long-term care as they age. Studies estimate the average 65-year-old retired couple is going to need between $250,000 and $300,000 for out-of-pocket health care expenses, though some reports push those numbers over $400,000. Regardless, it’s an intimidating number, especially for employees already struggling to save for retirement.
So how can HSAs help? These tax-advantaged medical savings accounts were created in 2003 as part of the Medicare Modernization Act to provide Americans with more knowledge about and more control over their health care spending. HSAs are designed to help people save money for current and future qualified expenses.
An HSA can be a very effective companion to a 401(k) plan when preparing for retirement. And for certain employees, after qualifying for their employer’s matching contribution in the 401(k) plan, it could make sense to max out their HSA contributions. There are three primary tax advantages:
- Like a 401(k) account, employees can make pre-tax contributions, lowering their taxable income. Employers can also contribute to the account, either in a lump sum or with each paycheck.
- The money grows tax-free and, depending on the HSA’s features, can be invested for greater growth potential.
- As long as the money is used for qualified healthcare expenses, withdrawals and any investment gains are 100% tax-free. (If money is withdrawn before age 65 for any reason other than paying qualified medical expenses, there is a 20% IRS penalty, and the funds are considered taxable income.)
An HSA’s positive features don’t end with the triple tax savings – they’re individually owned and portable, which means employees have control of their accounts and can transport them from job to job. Unlike a flexible spending arrangement (FSA), HSA money isn’t forfeited at year-end.
Though there are contribution limits, HSAs allow more than just the account owner to contribute, because after-tax contributions are also permitted (and if made by the account owner, these contributions can also then be deducted on personal taxes). Additionally, individuals age 55 or older can make catch-up contributions.
Employees can easily miss out on an HSA’s advantages if they are not properly educated about its features. The Shepherd Financial team is equipped to help your participants better understand their whole suite of benefits; call us today to schedule an HSA-focused employee engagement meeting!
None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.
View from the Top: Our NAPA 401(k) Summit Roundup
Because we’re passionate about staying at the forefront of industry trends and regulations, Shepherd Financial recently sent a team to the National Association of Plan Advisors (NAPA) 401(k) Summit. This national conference allows industry experts to interact and share relevant, best-practice strategies for serving retirement plans. Our team highlighted the following topics as key difference makers in the retirement industry, plan administration, benefits collaboration, and plan participant financial wellness:
Industry News: Plan Litigation
The news continues to swirl with lawsuits against corporations, alleging their 401(k) plans have high fees harming employees. Such litigation has brought greater awareness to the fees being charged in plans, as well as a sense of urgency for retirement plan committees to take their fiduciary duties seriously. For example, the duty of exclusive benefit means fiduciaries must be aware of and fully understand all expenses paid from the plan – but it doesn’t end there. Expenses must also be deemed reasonable for the services provided. There is no obligation to choose providers or investments with the lowest costs; the best choice for a plan is unique to the plan’s objectives and characteristics. The most important elements for avoiding litigation over fees come in the form of a consistent process and thorough documentation.
Plan Administration: Committee Relationships
It can be beneficial to establish a committee to assist plan sponsors in the development of prudent processes for plan governance. It’s considered best practice to select a committee chair and establish a committee charter. Utilizing a committee charter to formally authorize the purpose and scope of the committee defines how committee members are selected or appointed, how often meetings occur, and the roles of any outside consultants. Understanding each party’s role, financial liability, fiduciary responsibility, and signing authority can help ease the administrative burden.
Benefits Collaboration: Health Savings Accounts
The buzz continues around health savings accounts (HSAs): they’re the link between health care and finance, but many employees still don’t understand their unique benefits. These savings vehicles provide triple tax-advantaged opportunities (tax-deductible contributions, tax-free earnings, and tax-free distributions), but few are taking advantage. Often confused with flexible savings accounts (FSAs) or health reimbursement accounts (HRAs) and their ‘use it or lose it’ rule, unused HSA funds from the current year roll over to the next year, so participants don’t have to worry about forfeiting their savings. Additionally, employees are often not saving enough to fully utilize the investing capabilities of the HSA – savings can be invested in mutual funds, stocks, or other investment vehicles to help achieve more growth in the account. Clearer education is needed to enable participants to fully engage in their whole suite of benefits.
Plan Participants: Watch Your Language!
The retirement plan experience can be extremely intimidating for participants, and language choices from both plan sponsors and advisors are important. Communication needs to be positive, reasonable, clear, and personal. Participants respond well to a process that is readily accessible, but they first need to hear why they’d want to participate. Using phrases like ‘a comfortable and enjoyable retirement’ and ‘an easy, cost-efficient, and satisfying path to retirement’ resonated well with employees. Each company has unique demographics, so plan sponsors should work closely with their advisor to determine the best language fit for their participants.
This list doesn’t need to be overwhelming – navigate each of these areas by working with your advisor to create a retirement plan strategy every year. Incorporate a formal process that includes regular plan cost benchmarking, a thoughtful examination of plan design, thorough documentation of committee policies and procedures, and honest conversations about how to better equip participants to retire well.
Facing Our Fears
For nearly two years, our team has conducted a monthly financial wellness webinar for participants in the retirement plans we advise. These webinars focus on different topics meant to engage participants with their overall financial wellness. Some of our most popular presentations have been our Quarterly Market Reviews, The Basics of Investing, and Dealing with Financial Stress. We have one particular webinar so relevant, though, it’s been requested multiple times and in a variety of formats: Women and Investing.
But why? What’s the big deal?
The truth is, women face a totally different financial environment than men. With an ongoing gender disparity in compensation, years worked, risk tolerance for investing, healthcare costs, and overall lifespan, it’s no wonder there is an undercurrent of fear and confusion surrounding finances. Studies have revealed women do not feel confident – or even comfortable – discussing money or investing with friends, partners, or financial professionals.
Nearly 90% of women will end up managing their finances alone at some point in their lives1, whether due to not getting married, divorcing, or having their spouse pass away. This means learning to navigate expenses and medical/long-term care decisions on one income and without a partner with whom to plan.
So the big deal is this: women are falling far behind men when it comes to saving and retiring on their terms.
Our team simply refuses to settle for this reality. We want to empower women to ask – and answer – questions like these:
How should I initiate financial conversations with my spouse?
What’s a good plan for divorced ladies?
How soon is too soon to begin estate planning?
As a single woman, how do I get started when I feel so overwhelmed?
The process is simple, though it may not be easy.
Start by making a plan. Make it a priority to understand where you are (track expenses and create a budget) and where you want to be (create short-, medium-, and long-term goals). Identify areas where you need help (perhaps learning to invest, paying off debt, or determining your retirement income needs). Once you’ve done that, educate yourself – it’s good to engage in your own financial wellness! Make sure you figure out who’s on your team. It’s unreasonable to think you can or should do everything yourself. We have accessible, knowledgeable team members to make it easy on you. Take advantage of our resources and tools available. Finally, keep making the next right decision. Monitor your portfolio, stick to your plan, and look ahead.
Don’t let fear keep you on the sidelines of your own life.
1 National Center for Women and Retirement