HSAs and FSAs and Plan Coverage

With HSAs now a near must for many employees, clients may be asking questions about how best to offer HSAs and FSAs to their employees. Those clients may also wonder how HSAs interact with plan coverage.
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It’s estimated that Medicare will only cover about 60% of an employee’s health care needs in retirement.  That leaves 40% of costs to cover without assistance.  Some estimates place the amount that the average 65 year old retiring couple may need to cover health care costs anywhere between $200,000 and $250,000.  The answer many analysts provide to couples is to use a Health Savings Account (“HSA”).
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HSAs can be a helpful and important tool to add to a retirement savings equation. They allow deferred tax treatment on their growth. Yet, unlike other retirement accounts, money can be deducted tax-free now if that money is used for qualified medical expenses.  HSAs differ from flexible spending accounts (FSAs) that have a similar purpose.  FSAs require their account holders to deplete all of funds in the account by the end of a calendar year.  An HSA allows the funds remaining in the account to roll over each year, including any interest.  That allows for the fund to build over time.  HSAs also do not have to sit in a cash-ready account.  Some investors keep only the amount of their deductible in a money market account, and invest the remainder of the HSA in mutual funds. HSAs are only available if the individual or family has a high deductible health plan. Yet, what qualifies as a “high deductible” plan may be lower than you’d think. In 2018, a minimum deductible of $1,350 for individuals or $2,700 for families was all that was required. HSAs also have maximums that can be contributed each year. For 2018 the limit is $3,450 for self-only coverage or $6,900 for family coverage. Both HSAs and FSAs have relatively low contribution amounts, so employees may also benefit from learning about Limited Purpose Flexible Spending Accounts that could help employees with health care needs that exceed the amounts in HSAs and FSAs for health care costs not covered by insurance (such as infertility treatments or elective surgeries).
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In fact, some accounting experts think that HSAs could be more beneficial to investors than 401(k)s. That’s because the tax savings on contributions to an HSA in some circumstances may be greater than a similar contribution to a 401(k): HSAs allow you to contribute pre-tax dollars, grow the assets without taxes on income, and deduct assets for medical expenses. Many are taking advantage of this favorable tax treatment: by 2014 there were almost 13 million HSAs accounts. HSAs are the only type of retirement account that allows for both tax-deductible contributions as well as tax-free withdrawals (where qualified). Additionally, use of an HSA is not limited to the account holder; deductions from an HSA can be made tax-free for spouses and dependents of the account holder. And, what qualifies as a health expense may be broader than what and insurance plan covers with copays. This includes eye care, like contact lenses and eyeglasses as well as laser eye surgery, and physical therapy, as well as chiropractic care and acupuncture.
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HSAs don’t override eligibility for other retirement amounts, just like IRA contributions don’t impact contribution limits.  That means by offering an HSA, clients may be giving their employees an additional retirement savings option, and one that can help them prepare for the rising costs of healthcare in retirement. HSAs can also, in certain circumstances, allow for movement between retirement accounts. For example, in some scenarios, you can move funds from an HSA into an IRA. You can’t, however, move funds from an HSA into a 401(k).  
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