Although the American Health Care Act’s defeat has led to uncertainty on the specifics of healthcare reform, there is relative consensus in one area: the use of health savings accounts. House Republican leaders and the White House have already restarted their efforts to repeal the Affordable Care Act. Republicans know any transformation will need to come relatively soon as insurers begin to develop health plan packages for 2018. What changes are on the horizon, and how can you help clients fund healthcare needs?
Various GOP proposals have included plans to remove the requirement to have a high-deductible health plan in order to contribute to an HSA, raise contribution limits to $6,550 for individuals and $13,100 for families (from their current limits of $3,400 and $6,750, respectively), and to create a new type of account called a Roth HSA. It is likely that any future versions of the legislation will include provisions on HSAs.
HSA enrollment has already risen by nearly 54% since 2013, according to the Society for Human Resource Management, and new legislation could catapult them into the mainstream. Even with increased adoption, however, many individuals still misunderstand HSAs.
A quick refresher course on HSAs: these powerful savings vehicles offer a triple tax benefit to consumers. Money goes into them tax-free, can be invested tax-free, and comes out tax-free if used for a rather generous list of qualifying medical expenses. Savers can also use their dollars for general expenses in retirement (i.e. after the age of 65).
Unlike a flexible spending account, the money does not need to be used by a certain date, is investable and portable between jobs. This means the cash saved in an HSA can compound over the years and become another significant source of savings. When you consider that the average 65-year-old couple is projected to spend $260,000 on healthcare in retirement, the potential value of these vehicles starts to sink in.
401(k)s shifted retirement savings responsibility to the consumer, and Republicans hope to do the same for healthcare via HSAs.
Steps to take
The shift from pensions to 401(k)s, however, was far from smooth sailing. Early 401(k)s gave savers too much discretion over how to invest and whether they would save for retirement at all. Flawed education and overly optimistic projections were also a problem. Experts assured workers they would have enough to retire if they set aside just 3% of their paycheck. We know now that the ideal number is 10% or more.
Today, according to Boston College’s Center for Retirement Research, 52% of U.S. households are at risk of running low on money during retirement — up from 31% of households in 1983. The retirement industry has since taken steps to correct these problems, but for many savers it was too little, too late.
How do we avoid the same fate as we prepare for a widespread move to HSAs? Education will be critical from the outset. It is our industry’s fiduciary and moral responsibility to educate consumers on the cost of healthcare, and how HSAs can lessen their burden.
There are steps you can take to help your clients. Good advisers will provide healthcare cost projections and offer guidance on recommended savings rates and income needs. Great advisers will recognize clients want financial guidance, but also realize they need confidence their financial plan can help lessen the anxiety they feel around their health. In a recent AARP survey, 42% of respondents indicated they lose sleep over concerns about their physical health challenges, and 49% over financial concerns. It is important to recognize the psychological toll these worries can take, and understand how they can be calmed by putting an effective plan in place.
Regardless of the changes happening in Washington, our job as an industry remains the same: We must help employees identify their financial goals and save accordingly. It is essential to make a plan, and adjust as necessary in light of shifting policy or life circumstances.
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