Are you old enough to remember when pensions were a thing? Traditional pensions began fading in the 1980s when 401(k)s were introduced. Pensions are almost unheard of now except for government employees. But even 401(k) plans are not what they used to be. Needless to say, retirement benefits have changed drastically over the last 50 years.
If you own a small business, do you offer your employees a 401(k) plan? And if so, are you interested in an easy way to enhance that plan without spending a lot? There is a way. BenefitMall, a general agency based in Dallas, outlined it in a recent blog post discussing health savings accounts (HSAs).
For this idea to work, your company must offer a high deductible health plan (HDHP). Only employees enrolled in HDHPs qualify for HSAs. If your business fits the bill, read on. You will discover how offering an HSA can enhance existing retirement benefits.
How HSAs Work
HSAs are tax-advantaged accounts designed to help employees pay for healthcare expenses not covered by their insurance. Accounts are set up through employers and managed by third parties. Once set up, employees can contribute a certain amount of pretax earnings every year.
When an employee incurs a qualifying healthcare expense, money can be withdrawn from that account to cover it. As long as all withdrawals go toward qualifying expenses, no taxes are applied. Furthermore, any funds not used at the end of the year can be rolled into the following year without penalty.
So, do you see where this is going? The key to using an HSA to enhance retirement benefits lies in the tax advantages HSAs offer. But there is one other thing to consider: HSAs are managed as investments. So HSA funds can actually generate returns. Guess what? Those returns are also tax-free.
Retirement Funds Are Taxed
Retirement funds in a 401(k) also enjoy tax advantages. However, their advantages are not as robust. For starters, 401(k) contributions are made with pretax dollars. Every penny your employees put into their plans doesn’t get reported on the current year’s tax returns. Therefore, no income tax is assessed. But the tax-free status is temporary.
Taxes are assessed on all withdrawals in retirement. This represents a double-edged sword. Even though contributions were made with pretax dollars, taxes are assessed later on. The likelihood of income taxes increasing over the 40+ years of a typical career are pretty high. So in the end, most workers will pay more income tax on the retirement end.
The other side of the double-edged sword is the fact that returns are also taxed. Returns in a 401(k) are withdrawn as income. They are subject to the same income tax as an account’s principle.
HSAs Still Tax-Free
Getting back to HSAs, they are permanently tax-free as long as funds are used for qualifying medical expenses. How does this enhance retirement? By giving employees access to extra money for healthcare expenses after they retire.
You are aware that seniors pay for their healthcare through a combination of Medicare and private insurance. They also have co-pays to deal with. What if a retiree has rolled over HSA funds? Those funds can go to pay healthcare expenses rather than forcing the retiree to pay out of pocket.
The beauty of the HSA is that it does not cost your company anything to offer it. HSAs can be funded fully by employee contributions. Of course, your company can contribute as well, but it is not mandatory. You can offer HSAs as a way to enhance retirement savings at virtually no cost to you.