Financial Shutdown
Did the recent 35-day partial government shutdown affect you or someone you know? It’s quite possible, considering it forced 800,000 federal workers to miss paychecks and hurt many small businesses. And since the three-week spending bill expires soon, there could be even more financial repercussions.
These recent circumstances certainly give reason to pause and wonder: are you prepared for a financial shutdown in your life? If that question feels too broad, what about this one: if you were in a serious accident and had to miss work, how long would your current financial situation carry you? 35 days? 6 months?
This is about more than just creating an emergency fund – though you should, since it’s widely touted 40% of Americans can’t cover a $400 emergency. And it’s not just about having proper insurance coverage, though that’s certainly important, too. The bigger issue is thoughtfully creating a financial plan and knowing where to turn if the bottom falls out.
As a plan sponsor, you might feel the pieces in your plan are well-aligned. That’s positive news! But can the same be said for your employees? If they can’t currently address a $400 bill, how would they handle a total shutdown if it occurred? You can help prepare your team by proactively providing education and wellness opportunities, offering useful resources that speak to real situations, and taking the fear out of financial conversations.
Employees don’t get off the hook that easily, though – everyone is ultimately responsible for themselves. Consider the last time you gave yourself a financial checkup. Start with a budget you’ll actually follow, build up your emergency fund, and pay off debt. Then push deeper – ask for help to balance college funding, utilize a health savings account, max out your retirement account options, and optimize tax strategies.
The Shepherd Financial team is always only a phone call away. Whether you’re currently in a financial crisis or want to create a plan to see you through one, we want to help.
What the Health?
If you’ve been around the past few months, you’ve probably seen that health savings accounts (HSAs) are all the buzz in the retirement industry. But what’s the fuss?
Well, a major fear for adults is that they’re going to run out of money to pay for health care or long-term care as they age. Studies estimate the average 65-year-old retired couple is going to need between $250,000 and $300,000 for out-of-pocket health care expenses, though some reports push those numbers over $400,000. Regardless, it’s an intimidating number, especially for employees already struggling to save for retirement.
So how can HSAs help? These tax-advantaged medical savings accounts were created in 2003 as part of the Medicare Modernization Act to provide Americans with more knowledge about and more control over their health care spending. HSAs are designed to help people save money for current and future qualified expenses.
An HSA can be a very effective companion to a 401(k) plan when preparing for retirement. And for certain employees, after qualifying for their employer’s matching contribution in the 401(k) plan, it could make sense to max out their HSA contributions. There are three primary tax advantages:
- Like a 401(k) account, employees can make pre-tax contributions, lowering their taxable income. Employers can also contribute to the account, either in a lump sum or with each paycheck.
- The money grows tax-free and, depending on the HSA’s features, can be invested for greater growth potential.
- As long as the money is used for qualified healthcare expenses, withdrawals and any investment gains are 100% tax-free. (If money is withdrawn before age 65 for any reason other than paying qualified medical expenses, there is a 20% IRS penalty, and the funds are considered taxable income.)
An HSA’s positive features don’t end with the triple tax savings – they’re individually owned and portable, which means employees have control of their accounts and can transport them from job to job. Unlike a flexible spending arrangement (FSA), HSA money isn’t forfeited at year-end.
Though there are contribution limits, HSAs allow more than just the account owner to contribute, because after-tax contributions are also permitted (and if made by the account owner, these contributions can also then be deducted on personal taxes). Additionally, individuals age 55 or older can make catch-up contributions.
Employees can easily miss out on an HSA’s advantages if they are not properly educated about its features. The Shepherd Financial team is equipped to help your participants better understand their whole suite of benefits; call us today to schedule an HSA-focused employee engagement meeting!
None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.
View from the Top: Our NAPA 401(k) Summit Roundup
Because we’re passionate about staying at the forefront of industry trends and regulations, Shepherd Financial recently sent a team to the National Association of Plan Advisors (NAPA) 401(k) Summit. This national conference allows industry experts to interact and share relevant, best-practice strategies for serving retirement plans. Our team highlighted the following topics as key difference makers in the retirement industry, plan administration, benefits collaboration, and plan participant financial wellness:
Industry News: Plan Litigation
The news continues to swirl with lawsuits against corporations, alleging their 401(k) plans have high fees harming employees. Such litigation has brought greater awareness to the fees being charged in plans, as well as a sense of urgency for retirement plan committees to take their fiduciary duties seriously. For example, the duty of exclusive benefit means fiduciaries must be aware of and fully understand all expenses paid from the plan – but it doesn’t end there. Expenses must also be deemed reasonable for the services provided. There is no obligation to choose providers or investments with the lowest costs; the best choice for a plan is unique to the plan’s objectives and characteristics. The most important elements for avoiding litigation over fees come in the form of a consistent process and thorough documentation.
Plan Administration: Committee Relationships
It can be beneficial to establish a committee to assist plan sponsors in the development of prudent processes for plan governance. It’s considered best practice to select a committee chair and establish a committee charter. Utilizing a committee charter to formally authorize the purpose and scope of the committee defines how committee members are selected or appointed, how often meetings occur, and the roles of any outside consultants. Understanding each party’s role, financial liability, fiduciary responsibility, and signing authority can help ease the administrative burden.
Benefits Collaboration: Health Savings Accounts
The buzz continues around health savings accounts (HSAs): they’re the link between health care and finance, but many employees still don’t understand their unique benefits. These savings vehicles provide triple tax-advantaged opportunities (tax-deductible contributions, tax-free earnings, and tax-free distributions), but few are taking advantage. Often confused with flexible savings accounts (FSAs) or health reimbursement accounts (HRAs) and their ‘use it or lose it’ rule, unused HSA funds from the current year roll over to the next year, so participants don’t have to worry about forfeiting their savings. Additionally, employees are often not saving enough to fully utilize the investing capabilities of the HSA – savings can be invested in mutual funds, stocks, or other investment vehicles to help achieve more growth in the account. Clearer education is needed to enable participants to fully engage in their whole suite of benefits.
Plan Participants: Watch Your Language!
The retirement plan experience can be extremely intimidating for participants, and language choices from both plan sponsors and advisors are important. Communication needs to be positive, reasonable, clear, and personal. Participants respond well to a process that is readily accessible, but they first need to hear why they’d want to participate. Using phrases like ‘a comfortable and enjoyable retirement’ and ‘an easy, cost-efficient, and satisfying path to retirement’ resonated well with employees. Each company has unique demographics, so plan sponsors should work closely with their advisor to determine the best language fit for their participants.
This list doesn’t need to be overwhelming – navigate each of these areas by working with your advisor to create a retirement plan strategy every year. Incorporate a formal process that includes regular plan cost benchmarking, a thoughtful examination of plan design, thorough documentation of committee policies and procedures, and honest conversations about how to better equip participants to retire well.
(Yes, Books Cost That Much)
As the onslaught of end-of-school activities, exams, and graduation parties begins to fade, parents may heave a sigh of relief. Summer at last! The relief is short-lived, however, if you gaze slightly down the road. Whether your child is five or fifteen, college may very well be in their future. Have you begun thinking about how to pay for those expenses?
There’s simply no better time to begin planning than today. From harnessing the power of compound interest to hopefully avoiding drawing from your own retirement savings, there are a number of benefits to starting early.
One of the most flexible and affordable resources available to help fund a child’s future education is a 529 savings account. You can utilize tax-advantaged investing (earnings grow tax-deferred and are free from federal income tax when used for qualified higher education expenses), low fees and expenses, professional investment management, and potential state tax deductions or credits.* Here in Indiana, contributions to a CollegeChoice 529 account are eligible for a state income tax credit of 20%, up to a $1,000 credit per year.
In most plans, your choice of school is not affected by the state in which your 529 savings plan was established. Additionally, the funds in the 529 plan can pay for any eligible 2- or 4-year college, graduate school (including law and medical), or vocational/technical school. Tuition is not the only expense covered by 529 funds – other qualified expenses include textbooks, computers, and certain room and board costs. Even if your child is already in high school or uncertain if they want to go to college, you may still benefit from opening a 529 account. Aside from tax-deferred earnings, any unused assets may be rolled to another eligible family member’s account. Many 529 plans feature gifting programs that give family and friends a unique code to contribute to the account.
There are other funding options for higher education, including Coverdell Education Savings Accounts, federal and state grants, scholarships, and a variety of loans. If you have questions, our team at Shepherd Financial is always ready to help clear confusion and create solutions for your family.
Participation in a 529 College Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend an institution of higher education. Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals. Depending upon the laws of the home state of the customer or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 Plans may be available only if the customer invests in the home state’s 529 Plan. Consult with your financial, tax, or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state or any other 529 Plan to learn more about the features, benefits, and limitations or that state’s 529 Plan. For more complete information, including a description of fees, expenses, and risks, see the offering statement or program description.
*To find out if your state offers tax deductions or credits for contributions, visit savingforcollege.com.