401(k) Specialist Issue 1 - 2020 - 30

401(k) HSAs
H
ealth care is among the biggest expenses
that clients will face in retirement, and
the wildly disparate estimates make it
hard to plan for. Fidelity estimates that a couple
who retires today would need $285,000 to cover
medical expenses. The Employee Benefit Research
Institute (EBRI) projected that a couple with expensive
medications may need nearly $400,000.
HealthView Services, which publishes an
annual report projecting health care costs
in retirement, estimated in its 2019 report
that a healthy 65-year-old couple who lives
to their late 80s could spend more than
$606,000 on their combined health care
throughout their retirement.
Health savings accounts are a valuable
tool for clients trying to plan for these kinds
of costs. A client's million-dollar 401(k) balance
will look a lot bigger if half of it isn't
going to be spent on health care.
Since the HSA market was created in
2004 with the passing of the Medicare
Prescription Drug, Improvement and Modernization
Act, the number of HSAs reached
an estimated 25 million in 2018, according
to EBRI. Most of them-71%-have only
been opened since 2015.
HSAs can be used as a checking account
to cover current medical costs, or
an investment account to save for future
costs. Morningstar's " 2019 HSA Landscape
Report " found that total HSA assets topped
$60 billion as of mid-2019. Although the
vast majority of those assets (nearly $50
billion) are in checking accounts, invested
assets are growing at a faster rate, the report
found.
Leo Acheson, director of multiasset and
alternative assets for Morningstar, noted that
it's not clear if that's due to market appreciation
or increased adoption.
The industry is taking steps to make it
easier for clients to invest in HSAs. Over the
past three years, Acheson has seen providers
30
ISSUE 1 2020 | 401kSpecialist.com
'At age 65, that
HSA is a 401(k)
on steroids.'
- Matt Clarkin, Access Point HSA
trim the fat from their investment menus.
" When we initially began evaluating these
HSA providers in 2017, some of the providers
offered hundreds of investment options
in their investment menu, which in our view
is overkill. It can lead to decision paralysis
when you're faced with that many choices, "
he said. The 2019 report found the largest
menu had been streamlined to a much less
intimidating 33 investment options.
'401(k) on Steroids'
Most advisors know HSAs are " triple tax
advantaged. " Investors can fund the accounts
with pretax dollars, interest earned in the
account isn't taxed and distributions aren't
taxed when they're used on qualified medical
expenses.
Matt Clarkin, president and cofounder
of consultant firm Access Point HSA, notes
that after a certain age, the 20% penalty for
using HSA funds on nonqualified expenses
goes away.
" At age 65, that HSA is a 401(k) on steroids.
If I use it for a qualified medical expense, it's tax
free. If I use it for something other than that,
I'm just paying ordinary tax on it. "
HSAs still turbocharge 401(k) savings for
clients under age 65.
" On the essentials and the lifestyle, you've
got the 401(k) doing a great job, but it can't
do as good a job on the medical as the
HSA can, " Clarkin said. Medicare Parts B
and D are means-tested, he pointed out, so
" if I'm only using my 401(k) to pay for my
expenses in retirement, I may actually end
up spending more for Medicare Part B and
D because it's means-tested based on my
modified adjusted gross income. As opposed
to if I'm using my HSA for that third leg of
the stool, I avoid the possibility of having
to pay more for Medicare in the first place,
never mind the fact that I'm able to prepare
for it on a tax-free basis. "
High Deductibles Set High Hurdles
As many advisors also know, to begin
saving or investing in an HSA, clients must
be covered by a high-deductible health plan
and can't be on Medicare. However, that
can present a challenge to investors who are
afraid of a high deductible.
" When they sit down and try to decide
[between] a traditional plan or going with
the high-deductible health plan, ... they never
consider what that HSA could possibly do for
them. So, they missed a real big part of the calculus
to make that decision in the first place, "
Clarkin said. Advisors can provide a real service
to their clients by helping them compare
the relative savings of their health plan options,
including coinsurance and copays after they
meet their deductible.
" When I get past the deductible and
I look at the difference in my premiums
between the high-deductible plan and the
PPO, there's 100% chance that whatever
your savings is on that premium, you'll realize
it, " Clarkin said. " You have to; it comes
out of your pocket. "
There isn't a 100% chance that an investor
will have to pay their full deductible, he
pointed out.
" One size never fits all, but there are a lot
of folks who are probably on the PPO based
just on being spooked by the deductible.
[They're] not thinking about the idea that
you may not pay that deductible, the entire
thing, and you are going to see the savings
on your premium and you've got this HSA
available to you, which is a super powerful
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401(k) Specialist Issue 1 - 2020

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