By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC
If you offer a High-Deductible Health Plan (HDHP) to your employees, they probably have the ability to contribute to Health Savings Accounts (HSAs). I believe that nearly everyone eligible to contribute to an HSA should max out their HSA contributions before making any 401k retirement plan contributions. Here’s why.
HSAs are triple tax-free
HSA contributions are made pre-tax and when balances are used to pay qualified health care expenses, they come out of HSA accounts tax-free. Earnings on HSA balances also accumulate tax-free. There are no other employee benefits that work this way.
No use it or lose it
Employees 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, forever. Well at least until the employee passes away. HSA balances are never forfeited due to lack of use during a year.
Retiree healthcare expenses
Anyone fortunate enough to accumulate an HSA balance that is carried over into retirement may use it to pay for many routine and non-routine healthcare expenses. HSA balances can be used to pay for 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. HSA accounts are a much more tax-efficient way of paying for healthcare expenses in retirement, especially if the alternative is taking a taxable 401k plan distribution.
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.
HSAs will continue to become a more important source of funds for retirees to pay health care expenses as high-deductible health plans becomes more widespread. Make sure you educate your employees on their use.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.