Kevin Mahoney, senior institutional consultant at The Mahoney Group of Raymond James, a financial advisory firm, wants employers to take 401(k) plans and health savings accounts (HSAs) out of their silos and consider them instead as two sides of the same long-term financial-planning and investment coin. SHRM’s Stephen Miller shares his notes on the talk Mahoney gave at SHRM’s 2017 Annual Conference and Exposition this week:
HSAs have triple tax advantages. While funds contributed to either an HSA or a traditional 401(k) are excluded from income taxes, HSA contributions, up to annual limits, are also excluded from FICA and FUTA payroll taxes. In addition, funds can be withdrawn from an HSA on a tax-fee basis to pay for health care expenses.
“Many people don’t realize that if you save your health care receipts in a file today, then during retirement you can withdraw HSA funds tax-free against those years-old receipts,” which can turn the HSAs into a fund to pay for more than just future health care expenses. These advantages lead to a startling idea: “HSA savings is probably the best approach a young employee can take, so contributing to an HSA up to the limit—even before contributing to a 401(k)—makes sense,” Mahoney said.
It can also be in employees’ long-term interests not to pay for routine health care expenses using an HSA, in order to let those funds build up. For these expenses, “spend money out of cash flow today when you have it, and then take the money out in retirement,” he advised.
Mahoney is not the first to point out that the tax advantages HSAs enjoy make them a potent long-term savings vehicle. Last year, personal finance expert Ann Carrns underscored these same benefits by way of urging employers to educate their employees about the power of HSAs. Carrns pointed to a study showing that high-income employees were far more likely than low-income employees to make use of HSAs, in part because they were more likely to understand their special features. Another study by Wells Fargo Insurance last year found that financial incentives (i.e. employer matching) had no impact on participation rates, which also could indicate that many employees just don’t get how valuable these tax-advantaged accounts can be.
Presenting HSAs to employees as vehicles for long-term savings and retirement planning could be one way to drive higher participation. Additionally, Mahoney suggested in his conference session, employers might consider auto-enrolling employees and auto-escalating their contributions to HSAs the same way many do with their 401(k) plans.
Furthermore, US health care policy may increasingly favor the use of HSAs in the coming years, as both the Trump administration and Congressional Republicans have included provisions to incentivize them in their proposed alternatives to the Affordable Care Act.