Helping your employees save for the long term

Making the most of the DC plan and Health Savings Account

WORKPLACE THOUGHT LEADERSHIP - 01/23/2019

We believe health and financial wellness are foundational to living well. As an employer, you likely provide your employees access to benefits that can help them save for both short- and long-term goals, like retirement.

Having access to both a defined contribution (DC) plan and a Health Savings Account (HSA) gives them the opportunity to set aside a lot of tax-advantaged money each year. These essential benefits can help your employees plan for their retirement security and set aside funds for out-of-pocket health care expenses, two vital areas in the planning equation.

On their mind ... and yours

Research consistently shows that retirement and health care expenses continue to be two key sources of concern for employers and employees, and it's no wonder: Paying for their health care and, indeed, for their longevity, will likely be the largest expenses your employees will ever face.

With all that is at stake, it's never been more important to educate employees on the long-term advantages that DC plans and HSAs can offer.

Employee dollars at work. Where should they go?

Both a DC plan and an HSA can help employees save for the long term. For those employees who are enrolled in the DC plan and have access to an HSA, how can you help them make an informed decision about optimizing their contributions to both?

The answer is a very personal decision based on an employee's financial circumstances. However, it can be made easier with simple steps that can guide decision-making.

That's why Fidelity offers this point of view on savings prioritization and provides education and tools that make it easier for your employees to determine how to allocate their contributions to the DC plan and HSA—and in what order.


Savings Prioritization: DC plan or HSA? The answer? Both.

Your employees can leverage the benefits of both a DC plan and an HSA to work to their best advantage. This simple framework can help your employees with this important savings decision.

Step 1: Employees should contribute to their DC plan up to the employer match (if applicable) and set aside at least enough in their HSA to cover expected medical expenses in the current year.

Rationale:

  • We recommend saving at least the equivalent of 15% of their income for retirement, including employer contributions, throughout their career. Taking full advantage of an employer contribution can help employees reach this goal.
  • It's also important that employees set aside at least enough to cover their medical expenses for the year in their HSA, in order to get the benefit of the tax break.

Tip: Your employees may not know how much they spent last year on qualified medical expenses. In that case, they may want to save the amount of their deductible in their HSA, which includes any contribution their employer makes.


Step 2: Employees should then max out their HSA to get the triple tax advantage.5

Rationale:

  • Health care costs are a true wild card, one that cannot be ignored. Fidelity currently estimates that a couple retiring at age 65 in 2018 will need $280,000 to cover health care expenses throughout their retirement6—it's not something to leave to chance. That's why your employees should take advantage of every opportunity to save for these expenses.
  • HSAs offer a triple tax advantage: Contributions are tax-free, balances grow tax-free, and savings can be withdrawn tax-free for qualified medical expenses.5

Tip: Stress to employees that their HSA isn't just for paying today's health care bills. It's also a powerful tool to help them save for health care expenses in retirement.

Tip: If you offer your employees access to a limited-purpose Flexible Spending Account, consider encouraging those employees who max out their HSA to contribute and pay for current eligible medical expenses from the FSA, preserving their HSA funds for saving and investing.


Step 3: With any additional savings dollars, employees should contribute as much as they can to their DC plan, up to the maximum.

Rationale:

  • Contributing up to the DC plan max will help your employees receive the most favorable tax treatment this year.

Help your employees know where they stand and where they need to go


Savings prioritization tools from Fidelity can help to analyze an employee's individual situation and identify the steps they can make to take their savings and investing to the next level. Making an informed decision is empowering and builds confidence for your employees. And reducing financial stress and confusion is good for your workforce, and good for your company.

Help your employees better understand how to allocate their contributions dollars to their DC plan and HSA by sharing this education piece with them: Where to save your money for the long term.

NEXT STEPS

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

1 Fronstin, Paul, "Workers Rank Health Care as the Most Critical Issue in the United States," EBRI Issue Brief, Sept. 24, 2018.

2 Fidelity Total Well-Being Survey, August 2018.

3 Fidelity Investments online survey of 500+ employers, March 2017.

4 2017 Retirement Confidence Survey, EBRI.

5 With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. The triple tax advantages are only applicable if the money is used to pay for qualified medical expenses.

6 Estimate based on a hypothetical couple retiring in 2018, 65 years old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Actual assets needed may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes: cost basis is assumed to equal market value. Estimate is calculated as the assets required today in a taxable account with an effective tax in retirement of 5%, an asset allocation of 30% equity, 50% bonds, and 20% cash, such that there is a 90% chance of being able to pay for health care expenses through life expectancy. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage but do qualify for the federal government's insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care.

For Plan Sponsor and investment professional use only. Not for use with plan participants.

Approved for use in the advisor and 401(k) markets. Firm review may apply.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

© 2019 FMR LLC. All rights reserved.

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