Utilizing Your HSA Plan

Wednesday, November 7, 2018

Utilizing Your HSA Plan

Discrimination testing is part of most of our lives if we participate in a non-Safe Harbor retirement plan. Discrimination testing (also known as ADP/ACP testing) is performed each year on plans with 401(k)/Roth employee contributions and on the matching contributions (again, unless the plan has a Safe Harbor Contribution that clears the annual testing measurements).

When a test does not pass the regulatory requirements one of two correction methods must happen. The Employer can make further contributions to the Non-Highly Compensated Employees (NHCE) to increase their percentages in order to pass the test. The other correction method and one that is most popular is to refund the Highly Compensated Employees (HCE) a portion of their contributions to the plan in order to bring the disparity between the two groups in line with federal regulations.

If you have experienced a testing refund in the past your first reaction may be to reduce the amount of contributions you are making to your plan. Refunds are not RED flags for the IRS, so receiving one back shouldn’t be a worry to you. So my suggestion would be to keep contributing to be sure each year you are getting the most dollars into the plan allowed by law.

If you haven’t already fully funded your HSA contribution for the current or prior year and you receive a refund due to failed testing, consider fully funding your HSA. HSA’s are a tax deductible way for you to save for those unexpected medical occurrences if you are in a High Deductible Health Insurance Plan. Like with any tax deductible investment vehicle there are limits to the amount you can fund. For 2018 they are as follows:

HSA Individual - $3,450
HSA Family - $6,900
HSA Catch up - $1,000

This strategy can also help if you have hit your annual contribution amounts to a plan for your employee contributions (for 2018 deferral limits: $18,500 and for the 50 and older contributor $24,500).

Should you have questions regarding a testing refund and the use of an HSA as a place to “park” that refund, or if you would like to talk about opening an HSA with us, do not hesitate to call one of our Retirement Plan team members here at First Merchants Private Wealth Advisors.

 

N. Jane Smith, Director, Retirement Plan Services

Investment Management solutions provided by First Merchants Private Wealth Advisors may not be FDIC insured, are not deposits of First Merchants Bank, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency.  This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.

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