U.S. companies have come to embrace health savings as a benefit for employees in recent years. Many businesses increasingly see HSA’s as plan developers intended -- as a healthcare spending vehicle that allows users to save for healthcare expenditures on a tax-advantaged basis.
That premise sounded so good that U.S. consumers now have over $100 billion held in HSAs, representing the highest funding point since health savings accounts were rolled out in 2003.
“The reason HSAs are so popular and powerful is that they have a triple tax benefit; you get a tax deduction for putting money in, it grows tax-free and comes out tax-free if used for medical expenses,” said Childfree Wealth founder Jay Zigmont.
The primary challenge is that you must be in a high-deductible healthcare plan (HDHP) to qualify for an HSA. “Choosing an HDHP just to get an HSA may not be a great idea as you may be able to choose a better healthcare plan without an HSA,” Zigmont said.
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More Like a 401k?
As interest grows for a triple-threat long-term savings account, U.S. employers are increasingly positioning their HSA accounts as a key component in their long-term employee retirement strategies.
According to the Plan Sponsor Council of America’s (PSCA) 2022 Health Savings Account Survey, sponsored by HSA Bank, investment-oriented retirement plans are starting to influence HSA program designs.
“Most noticeably, half of large employers -- and more than a third of respondents overall -- indicate that they do or will position the HSA as part of a retirement savings strategy to employees,” the PSCA survey of approximately 450 employers said.
One sign that companies are leaning toward the savings aspect of HSA plans is automatic enrollment numbers, which are on the rise.
“40% of respondents is the use of automatic enrollment – up from 35.3% in 2020 and 32.2% in 2019,” the study reported. “Automatically opening HSAs and enrolling employees dramatically increases the savings rate.”
This figure includes more than half of small organizations that automatically open an HSA for employees when they enroll in the HDHP. “Moreover, 57.2 % allow rollovers from HSAs for newly hired workers, and 62% percent educate and encourage rollovers from other HSAs -- moves that support the growth of these savings accounts,” the PSCA report stated.
Finance experts say that health savings accounts are already being used as retirement savings plans, specifically for medical expenses.
“In this way, they are both a healthcare savings vehicle and retirement savings,” Zigmont said. “The key is that the tax benefits for HSAs are better than Roth or Traditional retirement savings plans.”
The IRA Way
Companies seem so bullish on HSA plans, they’re finding other ways to optimize the plans for employees - including with more of a retirement investment philosophy.
“Things certainly seem to be trending the retirement investment way with HSA’s,” said The Haney Company founder Brian Haney. “With the growing pressures and recent legislative emphasis on helping Americans retire successfully, coupled with the medical and insurance market trend of encouraging consumers to recognize the need to share in more of the cost burden of care.”
“For those reasons, HSA accounts should continue to grow in prominence,” Haney said. “There are certain advantages to putting money into these accounts, including investment earnings and favorable tax treatment.”
In many ways, HSAs are already considered by many to be an alternative type of retirement plan.
“Myriad studies provide detail on the cost of medical care in retirement,” said Benefit Resource's vice president of strategy Becky Seefeldt. “An HSA, given the detail provided previously, is set up to be a retirement plan designed to cover medical expenses in retirement but may be used at any time as the account holder’s financial situation may warrant.”
"The beauty of an HSA is in its ability to be both a long-term savings vehicle or a short-term tax-advantaged pass-through or spending account" Seefeldt noted.
Employers can help employees stack dollars to pay for healthcare in retirement instead of depleting a 401k account for eligible medical expenses.
“When you take money from a 401k in retirement to pay for eligible medical expenses you’re subject to pay ordinary income tax,” Seefeldt said. “If you build a larger balance in the HSA you never paid a penny in taxes on the way in, and more importantly a penny on the way out if used for eligible health expenses.”
How to Get the Most From Your HSA Plan
To optimize your HSA experience, go ahead and treat the management side like you would a 401k plan.
“The best advice is the same I’d recommend for any retirement plan,” said The Haney Company founder Brian Haney. “Start early, save as much as you can, and be intentional with setting aside funds strategically in a consistent manner over time.”
The earlier you start, the greater the amount you'll have when you retire, Haney noted.
“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, too.
“Find a reputable HSA provider with low fees, excellent service, and choice in the type and breadth of investment options available,” Seefeldt said.
