Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

Like it or not, there is a good chance that a high-deductible healthcare plan, along with a health savings account, will be coming your way during benefits open enrollment this year.

Sixty-five percent of large employers now offer a high-deductible healthcare plan alongside a traditional healthcare plan like a preferred provider organization, according to data from the Society for Human Resource Management. Another 5% of employers offer a high-deductible healthcare plan only. The penetration of high-deductible healthcare plans on the benefits menu represents a 20% increase from 2016, according to the society’s data.

Among those employees who can choose between a high-deductible healthcare plan and a PPO, many reflexively avoid the high-deductible healthcare plan due to the uncertainty factor—the fact that the employee must shoulder some if not most of his or her own healthcare costs until meeting the deductible. In reality, however, the high-deductible healthcare plan/HSA combo can be a good deal in many cases. High-deductible healthcare plan premiums will almost certainly be lower than the PPO premiums—the premiums are 42% lower than PPO premiums for people with single coverage and 40% lower for people with family coverage, according to SHRM’s 2018 data.

The health savings accounts on offer alongside high-deductible healthcare plans offer generous tax benefits, too: Pretax dollars go in, invested assets grow tax-free, and qualified withdrawals are tax-free, too. Those HSA tax benefits can be particularly valuable to people who can afford to pay their healthcare expenses out of pocket (using non-HSA assets), thereby letting the HSA assets compound on a tax-advantaged basis.

Yet research points to HSAs being underutilized by people who are eligible to take advantage of them. Very few HSA savers put the maximum allowable amount in their HSAs, and an even smaller percentage use an HSA to invest for the long term. Of course, it is highly possible that some of these reluctant HSA participants do not have the funds on hand to contribute the full max to the account; in 2018, that is $3,450 for people covered by a single-only plan and $6,900 for people covered by a family plan.

It is also possible that some would-be HSA savers have declined to take full advantage of their HSA to invest because they have done their due diligence on their employer-provided HSA plan and found it lacking. Even though HSAs have exploded in popularity over the past decade, many of them are larded with extra fees and/or feature subpar investment options. For example, in a recent landscape study, just one of the largest HSA providers fielded an HSA that was suitable for both HSA “spenders” (people who spend from the account on an ongoing basis) and “investors” (people who use the HSA to invest). Three of the 10 largest HSAs received positive assessments as spending vehicles, while four of the largest HSAs received positive assessments as investment vehicles.

You Are Not Stuck
What prospective HSA investors may miss, however, is that if they do not like their “captive,” employer-provided HSA, it is not the end of the line. Nor does going outside of the captive HSA require you to forego HSA payroll deductions—and the tax breaks that come along with them. Instead, it is possible to use an employer-provided HSA to take advantage of automatic payroll deductions, then periodically transfer the money to an HSA of their choice.

To identify the right HSA provider for you, step back and think about how you will be using the HSA. Will you be a spender, using the assets to cover healthcare costs? Or are you planning to use your HSA as a supplementary retirement savings vehicle, thereby taking maximum advantage of HSA’s tax-saving features? Perhaps you are multitasking?.

Transfer Versus Rollover
To get the money out of the HSA you do not like and into one that is better, you will hit a fork in the road: You will be forced to choose between a rollover or a transfer. There are some important differences.

With an HSA transfer, your existing provider is transferring the money directly to another HSA provider; the financial institutions are dealing with one another on the transaction and you are not receiving a check yourself. You will obviously need to have the new HSA account—the one that you will be transferring into—set up beforehand. You can conduct an unlimited number of transfers throughout the year, in contrast with a rollover, which you are only able to execute once a year.

HSA transfers can therefore be a good fit for people who would like to make regular transfers from one HSA (such as the unloved employer-provided one, which you contribute to in order to take advantage of the tax breaks) to another, better one. Be sure to read the fine print of your HSA before conducting a transfer, however. Some HSAs assess fees on transfers out. Those fees might apply to partial transfers of HSA balances or, more commonly, if you are transferring your whole balance out. Additionally, stay attuned to account maintenance fees levied on minimum balances below a certain threshold—on both the employer-provided plan and the plan of your choice. You may need to maintain minimum balances to avoid getting nickel and dimed with low-balance fees.

An HSA rollover has more strings attached than a transfer. In contrast to a transfer, where the two trustees handle the funds and leave you out of it, a rollover means you get a check for your balance; you must deposit that money into another HSA within 60 days or it counts as an early withdrawal and a 20% penalty will apply if you are not yet 65 (or if you do not have receipts to support medical expenses equal to the amount of your withdrawal). Another key difference, as noted above, is that multiple transfers are permitted between HSAs, but you are only allowed one HSA rollover per 12-month period. A key reason to consider a rollover, however, is if doing so can help you circumvent transfer fees, as discussed here.

Another key point in this discussion is that if you have done your homework on your employer-provided HSA and found it lacking, be sure to let your employee benefits department know of your concerns and where you have identified better options. Employers generally like to encourage HSA usage, so they are likely to be receptive to your feedback.

 

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