HSAs and 401(k)s: Coordinating them benefits everyone
New thinking offers a win-win for employers and employees
There's a lot of online chatter and buzz these days about helping employees take full advantage of HSAs, and how HSAs and 401(k)s should be viewed holistically. As Wells Fargo, the Healthcare Trends Institute and others have so nicely put it, HSAs and 401(k)s should be "partners" in retirement.
But how does this partnership work? Isn't the 401(k) for retirement and the HSA for healthcare? What's in it for HR and for the company? What's in it for employees?
"But wait," you say, "they're very different kind of accounts." That's partly true. The HSA is typically two different accounts: a transactional or demand account with a debit card to cover near-term medical expenses, and an investment account to pay for healthcare in retirement.
Yes, there are often educational resources from the HSA administrator, and sometimes program features to help with utilization-related needs, medical receipt archival, provider pay, lists of qualified medical expenses, and so on.
But have you ever seen personalized guidance for employees on HSA savings strategies? In all likelihood, no. Many employees save only what they think they'll spend. Others do whatever they did last year. There's rarely any guidance for what can be a very consequential decision, especially given the sizes of today's health plan deductibles and projected typical retirement healthcare costs.
With the HSA transactional account, it's important that employees have an appropriate savings reserve, just like an insurance company has reserves. After all, they're self- insuring up to the deductible or out-of-pocket max. Building that savings reserve enables employees and employers to consider higher deductibles with potentially lower premium costs, which can benefit both employers and employees.
But what about the HSA investment account? Do you invest your HSA funds? Significantly less than 20% of employees do. But more should because of the enormous tax advantages, even vs. 401(k)s. And for highly compensated employees, it's a significantly underutilized tax shelter. So ask yourself, would you be happy if less than 20% of employees took advantage of the 401(k)?
One major reason the HSA investment account matters is because for every $1 of healthcare spending during retirement, an employee needs to put $1.44 into a 401(k) vs. $1 into an HSA. That's an important difference, especially with retirement healthcare being such a big expense – estimated at well over $350k for a healthy couple. 1
Today, employees are deferring into HSAs and 401(k)s as siloed accounts. With a holistic view, there can be a big boost in retirement spending power without having to save an additional nickel.
Employers also benefit: reduced payroll taxes can really add up, and the cost of employees delaying retirement can be reduced. Delayed retirement can cost as much as $10,000 to $50,000 per employee per year, according to Financial Finesse. Improved financial wellness helps employees focus on their jobs, and can be a key strategy for reducing healthcare costs.
It's clear everyone wins when HSAs and 401(k)s are coordinated. The good news is that more attention is now being devoted to the topic. But for the "partnership" to be meaningful and to deliver on the promise, employees need personalized guidance on exactly what to save in each of the 3 accounts. And because employees need help battling inertia and actually making a change, they need a "do-it-for-me" button that can reach across different accounts for easy implementation. Now there's a program that delivers – NestUp Managed Deferrals®. It pulls together education, highly personalized suggestions, and a do-it- for-me button, so employees don't have to figure it out on their own and then try to implement it on their own. NestUp® provides guidance on near-term HSA savings, on long-term HSA savings and 401(k) deferrals, along with integrated execution.
With employees being asked to share more accountability, deal with more choices, and especially to cost-share more, coordinating the HSA with the 401(k) seems like an idea whose time has come.
1HealthView Services: 2015 RETIREMENT HEALTH CARE COSTS DATA REPORT © http://www.hvsfinancial.com/PublicFiles/Data_Release.pdf