850 Cassatt Road, Suite 310 Berwyn, PA 19312 610.251.0670 401(k) & HSA, “Better Together” 850 Cassatt Road, Suite 310 Berwyn, PA 19312 610.251.0670 www.tycorbenefit.com

Main Line Association for Continuing Education 401(k) & HSA, “Better Together” MACE Main Line Association for Continuing Education Thursday, September 28, 2017 8:30 am Penn State, Great Valley 850 Cassatt Road, Suite 310 Berwyn, PA 19312 610.251.0670 www.tycorbenefit.com

401(k)’s and HSA’s: Better Together Look for our cover story in the fall issue of Plan Consultant Magazine 401(k)’s and HSA’s: Better Together Live Well. Retire Comfortably.

401(k) & HSA, Better Together. Your Guide Today….. Kelton Collopy VP, TPA Services Tycor Benefit Administrators, Inc. 610.251.0670 KCollopy@tycorbenefit.com Joe Luscavage VP, Employee Benefit Services Tycor Benefit Administrators, Inc. 610.251.0670 jluscavage@tycorbenefit.com For our latest updates, insights & articles connect with!

Welcome

Todays Objectives….  Overview 401(k) and Health Savings Accounts  Stimulate you with ideas and practical stories  Inspire you to plan and think about tax effectives

It is not our intention…  To make you retirement or benefits experts  Provide you with an individualized road map to your success

401(k) & HSA, Better Together. The 401(k) overview

Why Save? People are living longer and healthier lives 401(k) & HSA, Better Together. Why Save? People are living longer and healthier lives You could spend 15, 20, 25 years or more in retirement The retirement income guideline: replace 75% - 85% of your current income You want work to be a choice Your financial independence is a necessity

Using a 401(k) to Save Higher Limits Immediate Tax Savings 401(k) & HSA, Better Together. Using a 401(k) to Save Higher Limits Immediate Tax Savings Roth availability not limited by income Protection from creditors claims

Roth After-tax Contributions 401(k) & HSA, Better Together. Traditional Pretax vs. Roth After-Tax Contributions Benefit Traditional Pretax Roth After-tax Contributions Tax-deferred Contributions? Yes* No Treatment of Plan Earnings? Tax Deferred* Tax Free** Tax-free Distributions? Yes** *When taking withdrawals from a tax-deferred plan before age 59 ½, you may have to pay ordinary income tax plus a 10% federal penalty tax. **Earnings withdrawn before age 59 ½, and before the end of the five -year holding period may be subject to income tax and a 10% federal penalty tax.

Chris takes home $180 more due to the lower taxes! 401(k) & HSA, Better Together. The Pretax Savings Advantage Example Chris Pat Gross Income $24,000 Less Pretax Contribution (5%) -$1,200 $ 0 Gross Income on W-2 $22,800 Federal Income Tax -$3,420 -$3,600 Adjusted Income After Taxes $19,380 $20,400 Less After Tax Savings -$0 Total Take Home Pay $19,200 Chris takes home $180 more due to the lower taxes! Assumes single individual, Federal income tax rate of 15%, and does not consider standard deductions or personal exemptions

Contributions Your Contributions 401(k) & HSA, Better Together. Contributions Your Contributions Up to $18,000 in pre-tax and/or Roth 401(k) deferrals for 2017 Catch-up contributions for those age 50 and older $6,000 for 2017 Employer may contribute match and/or profit shareing on behalf of Employees

The High Deductible Health Plan Overview 401(k) & HSA, Better Together. The High Deductible Health Plan Overview

Qualified High Deductible Health Plan 401(k) & HSA, Better Together. Qualified High Deductible Health Plan Defined under §223(c)(2)(A) as a health plan with an annual deductible that is (2018): Deductibles Not Less than: $1,350 for self-only coverage or $2,700 for family coverage Out of Pocket Maximums (deductibles, co-payments, and other amounts) do not exceed: $6,550 for self-only coverage or $13,300 for family coverage (in network). * The deductible must apply to all medical expenses (including prescriptions) covered by the plan. PPACA requires plans to pay for certain “preventive care” services on a first-dollar basis (before the deductible). These are more commonly referred to as “essential benefits.” Premiums are not included in Out of Pocket Maximums.

Health Savings Account 401(k) & HSA, Better Together. The Health Savings Account Overview

401(k) & HSA, Better Together. HSA Features Contributions from employer and/or policy holder, through payroll or direct* Do not require minimum distributions at age 70 ½ A “pure tax shelter” – No income limits or earned income requirements Triple tax advantaged when used for medical expenses Contributions are in addition to 401(k) and/or IRA/Roth contributions * Not to exceed IRS annual limits

401(k) & HSA, Better Together. Contributions….. The HSA account is the policy holders account (no joint accounts) Contributions can be made by employer and/or by policy holder (calendar year) Must not exceed: 2017 2018 Single $ 3,400 Single $ 3,450 Family $ 6,750 Family $ 6,900 Over 55 Catch-up…$1,000* Over 55 Catch-up…$1,000* Not counted as taxable income to the policy/account holder! Contributions to your HSA can be made by you, your employer, or both. However, the total contributions are limited annually. If you make a contribution, you can deduct the contributions (even if you do not itemize deductions) when completing your federal income tax return. You can make a contribution to your HSA each year that you are eligible. The maximum contributions are: 2016 Single……$ 3,350 Family……$ 6,750 Over 55 Catch-up……$ 1,000 2017 Single……$ 3,400 Family……$ 6,750 Over 55 Catch-up……$ 1,000 These amounts are adjusted annually for inflation * Separate accounts are typically required by HSA banking institutions

Account Owner Can Not Fund Their HSA….. …and be enrolled in Medicare! 401(k) & HSA, Better Together. Account Owner Can Not Fund Their HSA….. …and be enrolled in Medicare! …or be claimed as a dependent on someone else’s tax return! Qualifying Rules to Contribute to an HSA: • The individual must have coverage under an HSA-qualified “high deductible health plan” (HDHP) • The individual must have no other first-dollar medical group coverage (other types of insurance like specific injury insurance or accident, disability, dental care, vision care, or long term care insurance are permitted). • The individual must not be enrolled in Medicare. • The individual must not be claimed as a dependent on someone else’s tax return. Contributions to the Health Savings Account must stop once you no longer are enrolled in an HDHP or are enrolled in any other health insurance plan including Medicare. However, you can keep the money in your account and use it pay for medical expenses tax-free.

401(k) & HSA, Better Together. Contributions to the Health Savings Account must stop once the person is no longer enrolled in an HDHP or are enrolled in any other health insurance plan including Medicare. The money in a subscribers account(s) is available to pay for medical expenses tax-free.

Can I contribute to an HSA? 401(k) & HSA, Better Together. Can I contribute to an HSA? Are you insured under a QHDHP? Yes No PPO/HMO/ Medicare/No Insurance No Contributions to HSA Allowed! Contributions to HSA Your HSA Account

As You Approach Retirement…. 401(k) & HSA, Better Together. As You Approach Retirement…. PLANNING REQUIRED You cannot contribute to an HSA in any month that you are enrolled in Medicare. If you retire at your target year (currently 66) you can make pro-rated contributions up to that month. If you retire more than 6 months after your target retirement social security provides 6 months of “back pay” it also means it will back date part A Medicare. Warning for when you retire: You cannot contribute to an HSA in any month that you are enrolled in Medicare. And there’s a pitfall inherent in that rule that you need to be aware of. When you finally sign up for Social Security retirement benefits—probably when you’re on the point of retirement—and if you’re already at least six months beyond your full retirement age (currently 66)—Social Security will give you six months of “back pay” in retirement benefits. It’s a generous gesture, but it means that your enrollment in Part A will also be backdated by six months. Under IRS rules, that leaves you liable to pay six months’ of tax penalties on your HSA. To avoid the penalties, you need to stop contributing to your account six months before you apply for Social Security retirement benefits. Patricia Barry is a senior editor at the AARP Bulletin. for AARP Integrated Media and the author of “Medicare For Dummies” (Wiley/AARP, October 2013).

The HSA Bank Accounts Bank Fees Accrued Interest Claim Substantiation 401(k) & HSA, Better Together. The HSA Bank Accounts Bank Fees Accrued Interest Claim Substantiation -Investments Bank fees vary: $4.00 per month to $6.00 per month Interest (Low now) but not taxable Pairing accounts with carriers HDHP (Rolling over account balances)

Distributions from HSA accounts 401(k) & HSA, Better Together. Distributions from HSA accounts IRS Section 213(d) and Publication 502 QUALIFIED MEDICAL EXPENSES

IRS Section 213(d) Distributions Examples of Qualified Expenses: 401(k) & HSA, Better Together. Distributions IRS Section 213(d) Examples of Qualified Expenses: Long-term Care Medicare Parts B, C & D Premium * Private Hospital Rooms Acupuncture Viagra COBRA Premiums Executive Physicals Dental and Vision – Alternative way to fund dental and vision care *Not Part C, yes to certain supplement plans Medical Travel Dental Care Chiropractic Infertility/in vitro Durable Medical Equipment Hearing Aids & Batteries Rx Sun Glasses, Designer Frames & Contact Lenses * Excludes Medicare supplemental plans

IRS Section 213(d) Distributions from HSA accounts 401(k) & HSA, Better Together. Distributions from HSA accounts IRS Section 213(d) Specific on what is not a qualified expense Non-medically necessary procedures…i.e. without a Rx Gym memberships/personal trainer Anything of a cosmetic nature Over the counter drugs without an Rx Private carrier insurance premiums Expenses that are merely beneficial to general health. Dental and Vision – Alternative way to fund dental and vision care

IRS Penalties for NON-QUALIFIED distributions 401(k) & HSA, Better Together. IRS Penalties for NON-QUALIFIED distributions Any amounts used for purposes other than to pay for “qualified medical expenses” are: Under Age 65, Subject to a 20% tax penalty & taxed as ordinary income. Age 65 and older, Taxed as ordinary income but the 20% penalty does not apply. Disabled per Medicare Definition, Taxed as ordinary income, the 20% penalty does not apply.

Never choose a HDHP and not fund the 401(k) & HSA, Better Together. Never choose a HDHP and not fund the HSA at least to the level of your deductible!

 An FSA (Flexible Spending Account) 401(k) & HSA, Better Together. It is NOT….  An Insurance Plan  An FSA (Flexible Spending Account)  An HRA (Heath Reimbursement Account)  Short term

Taxable* It is also NOT…. * IRS rules apply 401(k) & HSA, Better Together. It is also NOT…. Taxable* * IRS rules apply

Any Questions? Here is your dollar in payroll…… 401(k) & HSA, Better Together. Here is your dollar in payroll…… Here is your dollar in the HSA*….. Any Questions? * IRS rules apply

The Working/Savings Years 401(k) & HSA, Better Together. The Working/Savings Years Investment Growth Investment Growth Investment Growth Investment Growth Investment Growth Investment Growth 401(k) Age 50“Catch Up” Age 50“Catch Up” Age 50“Catch Up” Contribution Contribution Contribution Contribution Contribution Contribution Match Match Match Match Match Match age 19 or 24/26 First Job Management, Marriage &/or Family Career Instability Retirement Career Maturity Deduct Deduct Deduct Deduct Deduct Deduct Deduct Deduct HSA OOP Max OOP Max OOP Max OOP Max OOP Max OOP Max OOP Max HSA starter Kit Coverage at Lowest cost Cost Efficient Family Premiums “ Age 55 Catch Up” “ Age 55 Catch Up” Self-insuring voluntary benefits (Dental & Vision) The COBRA “kitty” Maximizing Tax Deductions & age 55 catch up.. Investment Growth The “Medical 401(k)” *20% IRS Penalty for Distributions from HSA not in accordance with IRC 213(d)

The Retirement Years 401(k) HSA Medicare 401(k) & HSA, Better Together. The Retirement Years Your Retirement Income Your Retirement Income Your Retirement Income 401(k) Your Retirement Income Your Retirement Income Medicare Social Security Retirement Age Age 70 ½ Estate Strategies HSA HSA HSA HSA HSA HSA Avoids Probate Beneficiary Spouse Other No beneficiary named Non-Medical distributions at regular tax OOP Retirement Medical Expenses (Ex: Dental, Vision, Hearing Aids) No minimum distribution required Post Retirement Parts B, C & D Medicare Rx Donut hole

Pause for a moment & think about this: 401(k) & HSA, Better Together. The average American will face $260,000 in out-of-pocket expenses not covered by Medicare 1. Pause for a moment & think about this: Assumptions: Starting at age 27 Married at age 35 20% Utilization for Medical Out of Pocket Spend $1000 catch up at age 55 40% composite tax (state, county, federal etc.…) 8 years @ $3,400/year = $27,000 (Income to save: $37,880 post tax) 20 years @ $6,750/year = $135,000 (income to save: $189,000 post tax) 10 years @ $6,750/year + 2 over 55 $1,000 catch ups = $87,500 (income to save: $122,500 post tax) Sub Totals: $249,500 HSA $349,380 Post Tax Earnings Medical Utilization: $49,900 Some Social Security recipients are subject to the highest marginal income tax rates in the country, 55% in some cases 3 — depending on their other sources of retirement income in a given year.

$377,000 gross earnings/retirement 401(k) & HSA, Better Together. $351,000 gross earnings or $91,000 in taxes $260K @ 35% (composite) tax rate $377,000 gross earnings/retirement disbursement Or $117,000 in taxes $260K @ 45% 2 (composite) tax rate (retired)

Leverage the tax benefits (estimate 30% composite tax rate) 401(k) & HSA, Better Together. Leverage the tax benefits (estimate 30% composite tax rate) it could be $182,000 in savings!

401(k) & HSA, Better Together. For 2016 Bureau of Labor Statistics Reports that on average American’s spend more on Taxes than Food & Clothing Combined! 4 BLS: Americans Spend More on Taxes Than Food and Clothing Combined Chart Courtesy of CSNews.com 5

 Discipline Pre-Condition for Success: Fund Them 401(k) & HSA, Better Together. Pre-Condition for Success:  Discipline Fund Them Leave it alone! NO LOANS. Use the HSA for IRS Approved Spending Trusted Advisor….

Where are you on the Continuum? Baby Boomers…..Maximization those Tax Advantages! X & Y Generations….Use the “catch up provisions” & focus on retirement, it’s coming! Millennials…. Save, scoop up employer matching funds, invest, understand the difference in value of a post and a pre tax dollar & take advantage of changes to the tax code when they arise.

401(k) & HSA, Better Together.

Call us if you have any questions. 401(k) & HSA, Better Together. Don’t go it alone! Call us if you have any questions. Read about new opportunities and changes by linking to us

For additional information or questions contact Live Well. Retire Comfortably. For additional information or questions contact Joe Luscavage 610.251.0670 jluscavage@tycorbenefit.com

401(k) & HSA, Better Together. https://www.fidelity.com/about-fidelity/employer-services/health-care-costs-for-couples-in-retirement-rise 2 https://www.thebalance.com/taxes-in-retirement-how-much-will-you-pay-2388987 3 http://www.investmentnews.com/article/20160201/BLOG05/160209997/retirement-income-hit-with-highest-effective-tax-rates 4 https://www.bls.gov/news.release/cesan.nr0.htm 5 https://www.cnsnews.com/news/article/terence-p-jeffrey/