If your company has decided to offer a high deductible health plan, don’t worry, you are not alone. Recent studies show that an increasing number of employers have elected to offer high deductible health plans (HDHP) either to completely replace or be offered in conjunction with a more traditional Health Maintenance Organization (HMO)plan or Preferred Provider Organization (PPO) plan. When sponsoring an HDHP, employers typically offer their employees the ability to contribute to a Health Savings Account (HSA) to help offset the increased deductible associated with the HDHP. In 2015, 24 percent of all workers were enrolled in an HDHP with an HSA savings option. This is a dramatic rise since 2009 when just 8 percent were covered under such plans.
Contributions to an HSA are tax-deferred, like those in 401(k) plans, allowing employees to pay for qualifying medical expenses with pre-tax dollars. If your firm sponsors a 401(k) plan in addition to an HSA, an employee now has two programs to which they can allocate their savings dollars. But, can HSAs have a negative effect on 401(k) savings?
In a perfect world, employees would maximize both plans, as they serve different but equally important roles in an employee’s overall financial picture. Therefore, while there are many differences between HSA and 401(k) plans, by understanding a few key items participants can make informed decisions and elections to optimize both plans for their financial well-being. A few of these key items are outlined in the accompanying table.
Who is eligible to participate in an HSA? To be considered an eligible individual in 2018, an employee must meet the following requirements:
Though many HSAs are funded by employer payroll deductions, an employee may fund their HSA by simply writing a check to their account. Both employers and employees can contribute to an HSA in the same year; however, the combined contribution amount is subject to the IRS’s annual plan contribution limits. Contributions must be made in cash. No contributions of stock or property are allowed.
|Main Purpose:||To fund for qualifying medical expenses that are not covered by insurance.||Retirement funding|
|2018 Maximum Annual Contribution:||$3,450 (Single), $6,900 (Family)||$18,500|
|Catch-up contributions for those age 50 and over:||$1,000||$6,000|
|Investment Account Options:||Invested individually, typically in fixed asset accounts since funds need to be available to pay expenses.||Invested as part of the plan assets. Wide array of bond and equity investments available.|
|Tax-Deferred Earnings Growth:||Yes||Yes|
|Loans to Participants:||No||Yes|
|Tax Consequences of Distributions:||None, if used for qualifying medical expenses under IRC 213(d). If a non-qualifying expense, 20% penalty (up to age 65) plus ordinary income tax.||Tax-free distributions from Roth accounts. 10% distribution for withdrawals (up to age 59.5) plus ordinary income tax.|
|Party responsible for education and compliance:||Individual||Employer|
Making a choice about how to invest their available savings pool is not new for employees. Helping your employees to understand the different purposes of each plan will aid with decisions that affect their financial well-being.
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