By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC
Looking for an important, new executive benefit to share with your leadership group? Something that can really make a difference? If you offer a High-Deductible Health Plan (HDHP) to your employees, all of your executives should be maxing out their contributions to their Health Savings Accounts (HSAs). Read on below to learn why.
Contributions are tax-free
HSA contributions are made pre-tax. And they are really pre-tax. Like 401k pre-tax contributions, state and federal taxes are not withheld. Different from 401k 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 When balances are withdrawn and used to pay for qualified health care expenses, they come out of HSA accounts tax-free. Earnings on HSA balances accumulate tax-free as well. As a result, any amounts contributed into an HSA are completely tax-free.
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, forever. Well at least until the executive passes away. HSA balances are never forfeited due to lack of use during a year.
Different from 401k plan accounts, where Required Minimum Distributions (RMDs) begin at age 70 1/2, HSAs have no RMDs. Any remaining balance in an executive benefit account, when he or she dies, may be used by the surviving spouse.
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 401k plan balances to pay healthcare expenses.
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 non-routine 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.
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 After age 65 funds withdrawn from HSAs and used for non-healthcare related expenses are still subject to state and federal tax but do not incur a 20% penalty tax.
Portable executive benefit
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.
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 advisors to ensure they are using these accounts effectively. This is truly a unique executive benefit.
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.