As employers continue to be mindful of rising health care costs, we’ve seen a noticeable shift toward High Deductible Health Plans. With more individuals in HDHPs, there’s also been a significant increase in the use of Health Savings Accounts as a way to supplement funds for medical-related expenses.
Recently, there have been questions raised within the industry about how the increasing popularity of HSAs may pose a threat to 401(k)s as the deferral vehicle of choice. Despite the increased usage of HSAs, it’s unlikely that their growth has had a substantial impact on 401(k) contributions. In fact, the two vehicles can work well together to better position employees for the future.
The proliferation of HDHPs and HSAs
To understand how HSAs and 401(k)s can complement one another, it’s important to know what has driven their growth. In recent years,HSAs have expanded rapidly as individuals have turned to these plans through self-enrollment or by way of their employer’s insurance plan. Over the last decade, this has been driven primarily by employers moving from traditional Preferred Provider Organization/Health Maintenance Organization health plans to HDHPs.
See also: The future of benefits
By January 2014, some 17.4 million Americans were covered under HDHPs, which were the core drivers in the growth of HSAs prior to the implementation of the Affordable Care Act. This trend has driven the utilization of Health Reimbursement Accounts and Flexible Spending Accounts down substantially as employees have been attracted by the flexibility of the HSA.
Running the numbers
High deductible health plans and HSAs create a unique opportunity for many employers and employees. For a medium-sized company, the odds are pretty good that the employer has already — or is currently looking — to eliminate the traditional PPO or HMO that it used to offer and replace it with an HDHP. When this happens, the biggest question that an employee faces is how to fund the HSA.
The answer is somewhat simpler than they may think. Here’s an example:
Employee A’s bi-weekly employee payroll deduction for PPO/HMO insurance was $360 per pay period, which equates to an employee contribution of $9,360 per year. At the beginning of this year, Employee A’s company transitioned to an HDHP, paired with an HSA, with a new bi-weekly premium of $120 (or $3,120 per year). The lower premium leaves a significant excess of funds, totaling $6,240 saved from last year’s deductions. Employee A can direct saved premiums to fund an HSA to nearly the maximum allowable with no change to the employee’s take-home pay.
Funding the HSA vs. saving for retirement
As illustrated, the HSA under most circumstances can be entirely funded by offset premium spending, and therefore should not affect how the individual is saving for retirement. Many employers are offering HSA contributions for their employees which, in some cases, may actually free up a few more pre-tax dollars to contribute to 401(k)s without changing the aggregate pre-tax payroll deductions — a benefit that can appeal to employees of all ages.
From what we’ve seen among established employees, the shift to HDHPs with HSAs has not impacted their savings behavior. We know younger investors are more prone to want to pick one or the other, but the benefits of an HSA really become clearer later in life. After age 65, HSAs become parallel to a traditional IRA, as distributions used for qualified expenses — which include long-term care and Medicare insurance coverage — are tax-exempt
When it comes to providing employee benefits, it’s important for employers to view the entire picture. With an increased emphasis on participant outcomes, it makes a lot of sense for employers to consider multiple savings options. Whether your employees are saving for the short- or long-term, offering both an HSA option and 401(k) can make a significant impact.
Steve Christenson is executive vice president of Ascensus, where he oversees retirement-based products and services.
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