American companies have adopted health savings as an employee benefit in recent years. Many businesses increasingly see HSAs as what plan developers are intended to be—as a health care spending vehicle that allows users to save for health care expenses on a tax-advantaged basis.
That premise sounded so good that American consumers now hold more than $100 billion 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 advantage; you get a tax deduction for putting money in, it grows tax-free and comes out tax-free if used for medical expenses,” said Jay Zigmont, 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 just to get an HSA may not be a good idea, as you may be able to choose a better health care plan without an HSA,” Zigmont said.
More like a 401k?
As interest in a triple threat long-term savings account grows, American 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 beginning to influence HSA program designs.
“Most 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 for employees,” the PSCA survey of about 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 – 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 learn and encourage rollovers from other HSAs—moves that support the growth of these savings accounts,” the PSCA report states.
Financial 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 health care 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 positive about HSA plans that they are finding other ways to optimize the plans for employees — including with more of a retirement investment philosophy.
“Things are definitely looking up for retirement investing with HSAs,” says Brian Haney, founder of The Haney Company. “With the growing pressure and recent legislative emphasis on helping Americans retire successfully, along with the medical and insurance market trends to encourage 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 benefits to putting money into these accounts, including investment earnings and favorable tax treatment.”
In many ways, HSAs are already viewed by many as an alternative type of retirement plan.
“Numerous studies detail the cost of medical care in retirement,” said Benefit Resource’s vice president of strategy Becky Seefeldt. “An HSA, given the details previously provided, is set up to be a retirement plan designed to cover medical expenses during retirement, but can 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 health care in retirement instead of depleting a 401k account for qualifying medical expenses.
“When you take money from a 401k in retirement to pay for qualifying medical expenses, you’re subject to ordinary income taxes,” Seefeldt said. “If you build a larger balance in the HSA, you never pay a cent in taxes on the way in, and more importantly a cent on the way out if it’s 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 Brian Haney, founder of The Haney Company. “Start early, save as much as you can, and be intentional about strategically putting funds aside in a consistent manner over time.”
The earlier you start, the bigger the amount you’ll have when you retire, Haney noted.
“Whether you use the funds for medical expenses or not, you will not be disappointed that the funds are there for you when you need them most,” he said.
Also focus on getting the right plan manager.
“Find a reliable HSA provider with low fees, excellent service and choice in the type and breadth of investment options available,” Seefeldt said.