American companies have come to embrace health savings as an employee benefit in recent years. Many companies increasingly view HSAs as the designers of HSA plans – as a healthcare expense vehicle that allows users to save for healthcare expenses on a tax-advantaged basis.
That premise sounded so good that U.S. consumers now hold more than $100 billion held in HSAs, representing the highest funding point since the rollout of health savings accounts in 2003.
“The reason HSAs are so popular and so powerful is that they offer a triple tax advantage; you get a tax deduction for investing the money, it grows tax-free and comes out tax-free if used for medical expenses,” said Jay Zigmont, founder of Childfree Wealth.
The main challenge is that you have to be in a high deductible health care plan (HDHP) to qualify for an HSA. “Choosing an HDHP just to get an HSA might not be a good idea, because you might be able to choose a better healthcare plan without an HSA,” Zigmont said.
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More like a 401k?
As interest in a triple-threat long-term savings account grows, U.S. employers are increasingly positioning their HSA accounts as a key part of their long-term retirement strategies for their employees.
According to the Plan Sponsor Council of America’s (PSCA) 2022 Health Savings Accounts Survey, sponsored by HSA Bank, investment-oriented retirement plans are beginning to influence the design of HSA programs.
“Specifically, half of large employers – and more than a third of respondents overall – indicate that they position or will position the HSA as part of a retirement savings strategy for employees,” said said the PSCA survey of approximately 450 employers.
One sign that companies are leaning towards the savings aspect of HSA plans is the number of auto-enrollments, which are on the rise.
“40% of respondents use automatic registration – 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 HDHP. “In addition, 57.2% allow transfers from HSAs for newly hired workers, and 62% educate and encourage transfers from other HSAs – measures that support the growth of these savings accounts,” says the PSCA report.
Financial experts say health savings accounts are already being used as retirement savings plans, especially for medical expenses.
“In this way, they are both a health savings vehicle and a retirement savings vehicle,” Zigmont said. “The key is that the tax advantages of HSAs are better than Roth or traditional retirement savings plans.”
The IRA method
Companies seem so optimistic about HSA plans that they are finding other ways to optimize plans for employees, including with a retirement investment philosophy.
“Things certainly seem to be moving in the direction of retirement investments with HSAs,” said The Haney Company founder Brian Haney. “With increasing pressures and recent legislative emphasis on helping Americans retire successfully, coupled with the medical and insurance market trend to encourage consumers to recognize the need for share more of the burden of care costs.”
“For these reasons, HSA accounts should continue to grow in importance,” Haney said. “There are certain advantages to putting money in these accounts, including investment income and favorable tax treatment.”
In many ways, HSAs are already viewed by many as an alternative type of retirement plan.
“A myriad of studies provide details on the cost of medical care in retirement,” said Becky Seefeldt, vice president of strategy at Benefit Resource. “An HSA, as detailed above, is set up to be a retirement plan designed to cover medical expenses in retirement, but can be used at any time depending on the account holder’s financial situation.”
“The beauty of an HSA is its ability to be both a long-term savings vehicle or a short-term, tax-efficient spending or transfer account,” Seefeldt noted.
Employers can help employees accumulate dollars to pay for health care in retirement instead of depleting a 401k account for qualifying medical expenses.
“When you withdraw money from a retired 401k to pay for eligible medical expenses, you are subject to ordinary income tax,” Seefeldt said. “If you build a larger balance in the HSA, you’ve never paid a penny in taxes in, and more importantly a penny out if used for eligible healthcare expenses.”
How to get the most out of 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 one I would recommend for any retirement plan,” said The Haney Company founder Brian Haney. “Start early, save as much as you can, and be intentional about setting aside funds strategically and consistently over time.”
The earlier you start, the more money you’ll have in retirement, Haney noted.
“Whether or not you use the funds for medical expenses, you won’t be disappointed that the funds are there for you when you need them most,” he said.
Moreover, also focus on the right plan manager.
“Find a reputable HSA provider with low fees, great service, and choice in the type and extent of investment options available,” Seefeldt said.
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