By: Scott A. Hayes, CFA
Would Congress slash savings rates to raise current tax revenue? They have before! Prediction: HSA’s will become (even) better retirement savings tool
Last week I had the privilege of representing ISC at a meeting of financial services industry leaders in Washington DC. Much of the discussion surrounded the changing regulatory landscape under the Trump administration and changes that are likely to impact our industry and how we all save for retirement. Health care, tax reform and the rolling back of regulation are all on the table and earnest efforts are underway by the GOP to tackle all of these major tasks. I met with Chairman Brady of Ways and Means the prior evening and he was quite optimistic about the prospects of completing major reform in this first session of Congress. He was called back for a vote shortly after our meeting began – at 6:00 pm – and this was the day after the fourteen-hour session that led to the first vote on the new health care legislation. They are definitely putting in the hours!
So what is likely to happen? Despite the constant news stories that tell us that the Republican Party itself is fractured at every turn and the Democrats are entrenched in complete opposition to everything, as one participant stated “I am done betting on what he (Trump) can’t do.” Like him or hate him, President Trump is a salesman and a dealmaker. The night I was in Washington, for example, he had invited a group of Republicans from the House Freedom Caucus to go bowling at the White House to sell them on his health care initiative. I am not betting against him either.
Health care is the first major project on the agenda. Health Savings Accounts (“HSA’s”) are a cornerstone of the American Health Care Act and would become greatly expanded under any iteration of whatever health care legislation ultimately becomes law. Indeed health care is going the way of the pension plans of the past (used to be funded entirely by the employer, now funded by you (and your employer if you are lucky) and you have to decide how you use it). HSA’s are already a valuable retirement savings tool due to their quadruple tax-free status (pre-tax contributions, no payroll tax, grow tax deferred and are withdrawn tax free if used for medical expenses). They are about to get even better: Contributions for a married couple over 55 would increase to $15,100 per year, the penalty for withdrawing funds for non-medical expenses is reduced from 20% to 10% and you will now be able to pay supplemental Medicare premiums with these monies.
If you think about all of that, HSA’s would actually be preferable to 401(k)/403(b)/457(b) savings in many ways at that point. Even if you just spend it buying a boat (and didn’t save your medical receipts over the years to pay for it which you can actually do), the taxation is the same as taking it out of your retirement plan if you are over 65 (versus 59 ½). Use the HSA for medical expenses current or past (keep those receipts!) and there are zero taxes on the contributions or on the earnings. A married couple in retirement will spend $200,000 or more on health care according to a recent study by Fidelity Investments. Why not pay for some of that with tax free money?
I predict that we are about to see a major proliferation in HSA’s and integration with 401(k) plans is just around the corner. At ISC Group, we are now incorporating an HSA solution into our retirement advisory practice that will enable us to offer a supplemental HSA with dollar-one investments1 that can be added on top of any eligible employer’s2 existing plan. We have an opportunity to fill a gap here and help improve our clients’ retirement readiness by integrating the HSA discussion with traditional retirement savings strategies. Stay tuned for more information or just call us now if you are ready to learn more!
Tax reform is not likely to become center stage until healthcare is done and most of what I am hearing is that the earliest we could see tax reform is early 2018. There is some chance that the House can get a bill passed by the August recess this year if they can get healthcare done by Easter, but that is apparently not too likely. May or June of 2018 becomes the absolute latest time we would see it prior to the mid-term elections in November as the house members and a third of the Senate will be in full campaign mode by then. What will tax reform look like? As we wrote previously, the House Ways and Means Committee published “A Better Way Forward on Tax Reform”3 last June which provides a blueprint on dramatically simplifying the tax code. That first salvo at major reform would come at a price tag of $5 Trillion (give or take a few hundred billion) if enacted. How are we going to pay for that? The Border Adjustment Tax (“BAT”) would raise $1T (so 20% of what is needed) but everyone I have talked to says the BAT is DOA and will never pass the Senate which has 52 Republican members, two of whom are from the State of Arkansas (think Walmart would be happy about a BAT?).
Our concern is that Retirement will become the “piggy bank” for tax reform. As we have written about before, employer-sponsored retirement plans and IRA’s are currently the second largest tax expenditure of the Federal Government behind employer-provided health insurance. There are numerous ways that Congress could raise revenue off of retirement savings some of which have been talked about/proposed including: slashing contributions like they did with TRA ’86 (cut by 70%!), cap tax deferred contributions and require Roth only above $4,000 and incentive Roth conversions to generate current tax revenues on the $12T of tax-deferred savings currently inside IRA’s and employer-sponsored plans.
Another potential sea change to retirement savings could come from consolidating plan types, e.g. “the 401(x)” plan. Brian Graff, CEO of the American Retirement Association says that there is “an obsession” with senior staff on streamlining plan types by eliminating entire sections of the tax code. Mr. Graff says that house members are even talking about this socially because their staffers have raised the issue to them so frequently. We will pay particular attention to any developments on this front so that we can advise our non-profit and governmental clients and help navigate through any changes that come their way.
As many of you know, I am currently serving as the president elect of the American Retirement Association this year and I will be the president in 2018. I cannot imagine a better time in history to have a front row seat to the legislative process that is shaping and reshaping nearly every aspect of our industry. I am honored to serve and to do my small part in “working for America’s retirement.” I will continue to provide updates periodically when I have something that I think would be of interest to you and I encourage you to contact me if you have any particular concerns or opinions that you would like for me to voice as your advocate.