TELL ME SOMETHING GOOD! Planning for Post-Retirement Medical Expenses with 401(h) Plans

Among other things, I am a big fan of soul music. I am also a big fan of gospel music, particularly the R&B influenced version of gospel music with a strong nod towards Fred Hammond, Hezekiah Walker and Kirk Franklin. I have stated previously on the record that I am a big fan of The Godfather of Soul, James Brown. When it comes to Soul Sisters, I like Chaka Khan. The Chaka Khan song "Tell Me Something Good” is a good title for this blog. Readers on social media skim over articles looking for fresh and new ideas. In my view, the 401(h) Plan for post-retirement medical expenses is a very big idea. Why? Everyone with no exception, whether they like it or not, is headed for significant post-retirement medical expenses on their way through the Checkout line. If not you individually, it will be a spouse or a dependent, or all of you. Throw in a chronic illness and the costs increase dramatically!


Barrons recently reported in an article called The Real Cost of Healthcare in Retirement. The article suggests that seniors with adequate Medicare coverage will spend on average $260,000 per couple on healthcare from age 65 on. Only a third of this cost can be attributed to premiums, the balance of the costs is attributed to actual medical expenses. Healthcare Services, a firm that analyzes provided Barrons with an estimate of post-retirement HealthView Services analyzed post-retirement expenses for Barrons and estimated post-retirement medical expenses for high net worth couples at $565,140 in today's dollars. This projection does not consider costs for catastrophic illness. The cost of some prescriptions and treatments may escalate these dramatically. Prescriptions for a single specialty drug can exceed $100,000 per year for chronic conditions such as cancer, Parkinson’s, and heart disease. The annual cost of care in a nursing home can cost $100,000 - $150,000 per year. The average stay in a nursing home is almost five years. These are numbers that I am personally familiar with.


What is the solution to these future expenses? The 401(h) Plan is uniquely qualified to meet these expenses. The 401(h) Plan is an ancillary benefit to a qualified retirement plan that may only be added to a defined benefit plan or money purchase plan. The Plan allows for an additional tax-deductible contribution into the 401(h) plan which may only be used exclusively for the post-retirement medical expenses of the participant, participant's spouse, or dependents. The contribution limit for the participant limit in 2021 is $58,000 coupled with the participant's contribution for retirement purposes. The investment earnings within the Plan are tax deferred. Plan distributions for medical expenses in the post-retirement period receive tax-free treatment.


Many pension administrators ask the question, "If 401(h) plans are so good, why don't more plan sponsors, big and small, adopt 401(h) Plans?” For me, the answer is straight-forward. First, most businesses offering pension plans use prototype or volume submitter plans. The 401(h) plan may only be adopted for a Plan that is submitted individually. Second, the 401(h) Plan as an ancillary benefit is only available in conjunction with a defined benefit or money purchase plan. Defined benefit plans, arguably the plan type that provides the largest tax-deductible contributions and guaranteed pension benefits, may only be found in four percent of plan sponsors. This statistic in my opinion is the reason why no one can afford to retire. Existing plans can be amended as individual plans to add the 401(h) Plan.


Summary


The high cost of post-retirement medical expenses will not bypass any of us. These days modern medicine can keep us alive longer but not necessarily with a higher quality of life. The marvels of modern medicine come at a high price which each of us will get to pay. The possibility of chronic illness exacerbates our financial exposure. Good insurance does not and will not cover all of these expenses including nursing home care. The 401(h) Plan offers an additional tax deduction which benefits you now to save for those future medical expenses on a tax deferred basis with the ability to distribute those funds on a tax-free basis to pay medical expenses during retirement. Tell me that you like it!