American companies have come to embrace health savings as a benefit for employees in recent years. Many businesses increasingly see HSAs as plan developers intended—as a healthcare spending vehicle that allows users to save for healthcare expenses on a tax-advantaged basis.
The premise sounded so good that US
“The reason HSAs are so popular and powerful is that they have a triple tax benefit; you get a tax deduction for placing money, it grows tax-free and comes out tax-free if used for medical expenses,” said Childfree World 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 because you may be able to choose a better healthcare plan without an HSA,” Zygmont said.
More than a 401k?
As interest grows for a triple threat long-term savings account, US it. 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 (PSCA) 2022 Health Savings Account Survey, sponsored by HSA Bank, investment-oriented retirement plans are beginning to influence HSA program designs.
“More notably, 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 are using 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. “Additionally, 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.
Financial experts say that health savings accounts are already used as retirement savings plans, specifically for medical expenses.
“In that way, they’re both a healthcare savings vehicle and retirement savings,” Zygmont 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 down the retirement investment path with HSAs,” said Haney Company founder Brian Haney. “With the growing pressures and recent legislative emphasis on helping Americans retire successfully, along 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 these reasons, HSA accounts should continue to grow in prominence,” Haney said. “There are certain advantages to putting money in 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 earlier, is intended 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,” said Seefeldt.
Employers can help employees stack up dollars to pay for healthcare in retirement instead of depleting a 401k account for eligible medical expenses.
“When you take money out of a 401k in retirement to pay for eligible medical expenses, you’re subject to paying ordinary income tax,” Seefeldt said. “If you build up a larger balance in the HSA you never pay 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 Out of Your HSA Plan
To optimize your HSA experience, go ahead and treat the management side like a 401k plan.
“The best advice is the same I would recommend for any retirement plan,” said Haney Company founder Brian Haney. “Start early, save as much as you can, and be intentional about putting money away strategically in a consistent manner over time.”
The earlier you start, the bigger the amount you’ll have when you retire, Honey noted.
“Whether you use the money for medical expenses or not, you won’t be disappointed that the money is there for you when you need it most,” he said.
Additionally, focus on getting the right design manager as well.
“Find a reputable HSA provider with low fees, excellent service and choice in the type and breadth of investment options available,” said Seefeldt.