Health savings accounts (HSAs) have long been regarded as effective savings vehicles to pay for health care expenses in retirement, but the medical crisis of the COVID-19 pandemic has many employers rethinking HSAs for the future.
Refusing to Cut HSA Contributions
The coronavirus pandemic severely affected businesses and their employees alike, forcing some companies to lay off and furlough staff, eliminate bonuses and cut benefits. Experts warned employers of the potentially disastrous effect of cutting HSAs, such as compelling struggling participants to pay medical expenses out of pocket during a pandemic.
“We asked brokers and employers what concerns most of their employees and clients have, and 54% answered they are concerned for the health of themselves and their family, which shows the immediacy of the situation,” said Alison Moore, vice president of marketing at HealthSavings, an HSA provider, in May.
Still, experts noted there was little data to suggest employers were stopping HSA contributions. Instead, Moore said, at least one of her clients was decreasing its 401(k) matches to avoid touching HSA contributions. Instead, the client was considering elevating contributions to HSAs. “They believe the HSA benefit offers more immediate relief for the current challenges,” Moore said.
Employing Loans to Fund HSA Contributions
The passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act raised questions about Small Business Administration (SBA) loans and the Paycheck Protection Program (PPP)—more specifically their relationship to HSA programs.
While Moore noted that SBA and PPP loans can help employers make contributions to employees’ HSAs, the emergence of new, lengthy CARES Act guidance was taxing for employers. Many found little clarification on the regulation and instead were warned of potential compliance issues should they make a mistake or an oversight.
In an interview with PLANSPONSOR, Kevin Robertson, chief revenue officer at HSA Bank, an HSA administration provider, said employers may begin or increase HSA contributions for their employee population under SBA loans, but may not selectively contribute to just one or only some employees’ accounts. If it does, the employer can be subject to HSA comparability or nondiscrimination rules.
Under the CARES Act, rules on the PPP state that employers may use the money from these loans for payroll costs, and because the loans are intended for employees, plan sponsors may use them toward HSA features, said Moore.
Robertson still urged employers to tread carefully if applying such loans to HSAs, mainly because of limited understanding of the regulation.
Better Understanding of HSAs
To further familiarize employers with HSAs, industry experts reviewed rules and regulations on the accounts, in the 2020 PLANSPONSOR HSA Conference, presented online, in October.
Speakers discussed maximum contribution amounts for HSAs, limited to $3,550 for self-only coverage and $7,100 for a family this year. Those 55 and older could make a $1,000 catch-up contribution. As of 2020, the high-deductible health plan (HDHP) minimum deductible to trigger HSA eligibility is $1,400 for self-only coverage and $2,800 for family coverage, coupled with a maximum out-of-pocket limit of $6,900 for self-only coverage and $13,800 for family coverage.
The panel explained that individuals may make both pre-tax contributions through payroll deductions as well as after-tax contributions. They may also deduct from their income when filing tax returns. Another notable feature is that account holders may deduct from their own income the amount of HSA contributions made to their account by other people—but not the employer. Another favorable feature is that employer contributions are excluded from the employee’s income taxes.
The panel further noted that HSA funds may be used for other expenses, though penalties and taxes will apply in certain circumstances.
Retirement Plans and HSAs
In the short term, HSAs hold offer the benefit of complementing a medical plan, said Jeffrey Dorfman, managing principal of retirement practice at Qualified Plan Advisors. But, over time, the vehicles can help participants save money on qualified medical expenses in retirement.“We anticipate a merging of the conversation in which you no longer distinguish how you can help your employees in your 401(k) versus how you can help employees in [an] HSA,” he explained. “Most employees don’t look at their benefits package as six or seven features; they look at it as one.”
Steve Lindsay, senior vice president of relationship management at HealthEquity observed that 401(k) and HSA benefits complement each other, that instead of concentrating on one benefit offering, plan sponsors should provide a more holistic view of both.
A combination of these tactics can push HSA and 401(k) participation forward, Lindsay said. “We can drive a lot of behavior by helping them do the math and understand that this plan design creates wins for people,” he concluded.
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