Looking for an important employee benefit opportunity to share with your executive group? Something that can really make a difference? If you offer a high deductible health plan to your employees, all of your executives should be maxing out their contributions to their health savings accounts. Here’s why.
1. Contributions are tax-free. HSA contributions are made pre-tax. And they are really pre-tax. Like 401(k) pre-tax contributions, state and federal taxes are not withheld. Different from 401(k) contributions – there are no Social Security taxes deducted either. When balances are withdrawn and used to pay for qualified health care expenses, they come out of HSA accounts tax-free. As a result, any amounts contributed into a HSA are completely tax free.
2. No use it or lose it. Executives may confuse HSAs with flexible spending accounts, where balances not used during a particular year may be forfeited. In HSAs, unused balances carry over to the next year. And so on. HSA balances are never forfeited due to lack of use during a year.
3. No RMDs. Different from 401(k) plan accounts, where required minimum distributions (RMDs) begin at age 70 ½ , HSAs have no RMDs. Any remaining balance in an executive’s account, when he or she dies, may be used by the surviving spouse.
4. Paying for retiree healthcare. Building a significant HSA balance is not only important from the perspective of paying for healthcare expenses as an active employee, account balances can also be used to pay for healthcare expenses in retirement. This may allow a retired executive to avoid using taxable 401(k) plan balances to pay healthcare expenses.
5. Many eligible expenses. Any executive able to accumulate an HSA balance that is carried over into retirement may use it to pay for many routine and nonroutine healthcare expenses. Eligible expenses include prescription drugs, medical premiums, COBRA premiums, dental expenses, Medicare premiums, long-term care insurance premiums and of course any co-pays, deductibles or co-insurance amounts.
6. Using HSA balances after age 65. Before age 65 any withdrawals from an HSA that are not used to pay for healthcare expenses are subject to state and federal tax and a 20% penalty tax. After age 65, funds withdrawn from HSAs and used for nonhealthcare related expenses are still subject to state and federal tax but do not incur a 20% penalty tax.
7. Portability. HSAs are completely portable. It doesn't matter where an executive works or how many times he/she changes jobs. An individual’s HSA always remains with him/her.
8. Contributing and investing. Maximum annual HSA contributions at the moment are modest – $3,350 per individual or $6,750 for a family. Another $1,000 in catch-up contributions are permitted for those over age 55. The key to building an account balance that can carry over into retirement is maxing out contributions each year and investing unused contributions so account balances can grow. If your HSAs don’t offer investment funds, think about adding them in 2016.
There is tremendous flexibility built into the use of HSAs. Executives should work with their financial advisers to ensure they are using these accounts effectively.
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