US companies have embraced health savings as an employee benefit in recent years. Many businesses increasingly see HSAs as intended by plan developers — as a health care expense vehicle that allows consumers to save for health care expenses on a tax-advantaged basis.
Since health savings accounts were launched in 2003, US consumers now have over $100 billion in HSAs, which is pretty good.
“HSAs are so popular and powerful because they have a triple tax benefit; You get a tax deduction for putting money in, it grows tax-free and it comes out tax-free if used for medical expenses,” said Jay Zygmont, founder of ChildFree Wealth.
The primary challenge is that you must be in a high-deductible health care plan (HDHP) to qualify for an HSA. “Choosing an HDHP to get an HSA isn’t a great idea because you can choose a better health care plan without an HSA,” Zygmont says.
Like a 401k?
With interest growing for the triple-threat long-term savings account, US employers are making their HSA accounts a key component of their long-term employee retirement strategies.
Investment-based retirement plans are beginning to influence HSA program designs, according to the Plan Sponsor Council of America (PSCA) 2022 Health Savings Account Survey sponsored by HSA Bank.
“Most notably, half of large employers — and more than one-third of all respondents — indicate that they make or keep an HSA as part of a retirement savings strategy for employees,” the PSCA survey of about 450 employers said.
One sign that companies are turning to the savings aspect of HSA plans is automatic enrollment numbers, which are on the rise.
“40% of respondents use automatic enrollment – up from 35.3% in 2020 and 32.2% in 2019,” the study reported. “Automatically opening HSAs and enrolling employees can significantly increase the savings rate.”
More than half of small firms that automatically open an HSA for employees when they enroll in an HDHP account for this number. “Additionally, 57.2% allow rollovers from HSAs for newly hired workers and 62% encourage rollovers from other HSAs — moves that support the growth of these savings accounts,” the PSCA report said.
Health savings accounts are already being used as retirement savings plans, especially for medical expenses, financial experts say.
“In this way, they are both a health care savings vehicle and a retirement savings vehicle,” Zygmont said. “The key is that HSAs have better tax advantages than Roth or traditional retirement savings plans.”
The IRA route
Companies seem so bullish on HSA plans that they’re finding other ways to optimize plans for employees — including a retirement investment philosophy.
“Things definitely seem to be trending up in the way of retirement investing with HSAs,” said Brian Haney, founder of The Haney Company. “With growing pressures and recent legislative emphasis on helping Americans retire successfully, medical and insurance market trends are encouraging consumers to recognize the need to share more of the cost burden of care.”
“For those reasons, HSA accounts should continue to grow in importance,” Haney said. “There are some advantages to putting money in these accounts, including investment income and favorable tax treatment.”
In many ways, HSAs are already considered an alternative type of retirement plan by many.
“Myriad studies provide details on the cost of medical care in retirement,” says Becky Seefeldt, vice president of strategy for Benefit Resource. “An HSA, as explained earlier, is designed as a retirement plan designed to cover medical expenses in retirement, but can be used at any time as the account holder’s financial situation warrants.”
“The beauty of an HSA lies in its ability to be both a long-term savings vehicle or a short-term tax-advantaged pass-through or spending account,” notes Seefeld.
Employers can help employees pool dollars to pay for health care in retirement instead of drawing down a 401k account for qualified medical expenses.
“You pay ordinary income tax when you take money out of a 401k in retirement for qualified medical expenses,” Seefeld says. “If you build up a large balance in an HSA, you won’t pay a penny in taxes down the road, and a penny down the road, especially if used for qualified health expenses.”
How to Get the Most Out of Your HSA Plan
To optimize your HSA experience, treat management as you would a 401k plan.
“That’s the best advice I would recommend for any retirement plan,” said Brian Haney, founder of The Haney Company. “Start early, save as much as you can, and be intentional about strategically allocating funds in a consistent manner over time.”
The sooner you start, the more money you’ll have when you retire, Haney notes.
“Whether you use the funds for medical expenses or not, you won’t be disappointed that the funds are there for you when you need them most,” he said.
Additionally, focus on getting the right plan manager.
“Find a reputable HSA provider with low fees, excellent service and selection in the type and breadth of investment options available,” Seefeld says.