When your employees pair a health savings account (HSA) with your high-deductible health plan, they gain access to a financial tool that can help them pay for qualified medical expenses now and long into their retirement years.
But access is only one part of the equation. Too few participants understand the long-term potential of HSAs to help in retirement.
According to a 2021 PLANSPONSOR survey, most individuals use their HSA accounts for short-term medical expenses. The survey also revealed that employer communications are similarly focused on the near term. Only one in 10 employers promotes HSAs mainly as a tool for retirement health care costs.
Let’s explore ways to change this pattern and help your employees find even greater value in their HSAs.
Understanding the need
The near-term tax advantages of HSAs are often touted during enrollment periods, including that contributions can:
- Reduce taxable income
- Be distributed tax-free for qualified health care expenses
But it seems that much less is understood about the ability to save and invest HSA funds to help pay for retirement health care needs — or how great those needs may be.
A couple retiring this year at age 65 can expect to spend around $300,000 on retirement health care costs, according to the financial services company Fidelity.
Saving and investing in HSAs — particularly when those funds grow over the course of decades — can help employees prepare for those costs. Once an HSA account crosses a certain threshold, typically $2,000, participants can choose to invest their funds and let earnings grow tax-free.
However, according to Willis Towers Watson, only 6% of current HSA participants invest their assets.
How you can help
Use education on HSAs to change your employees’ focus from the near future to their retirement years, including:
- General financial education courses on HSAs and retirement expenses
- Personalized education based on life stages and events
- FAQs on HSA saving, spending and investing
- Online worksheets explaining the compounding effect of saving and investing
- Monthly reminder emails with a link to enroll or increase contributions
To be sure, employees sometimes need to spend down HSA accounts because they lack other funds to cover immediate medical expenses. But many participants use their HSA funds simply because they don’t understand the potential long-term gains.
Whereas most employees know that 401(k) retirement savings are meant to replace salary and help pay for post-career housing, food, travel and more, few are aware of the similar benefits of HSAs to help cover retirement health care expenses.
In fact, HSAs even offer some advantages beyond those of 401(k)s. Not only do HSA earnings grow-tax free, but they can also be distributed tax-free for qualified medical expenses.
In addition to tax advantages, highlight the ability of HSAs to pay for common (and costly) retirement health care needs, including:
- Premiums for Medicare Parts B, C and D
- Medicare deductibles, copays and coinsurance
- Dental and vision costs
- Hearing aids
- Over-the-counter medications
- Medical equipment and supplies
It’s also helpful to remind employees that HSA accounts are portable and travel with them if they change jobs.
To stay within IRS rules, be sure to communicate the maximum HSA contribution levels each year. For 2023, maximum contributions are:
- $3,850 for individuals
- $7,750 for families
- $1,000 catch-up contributions for age 55 and older
Tools to increase usage and contributions
In addition to providing education on the long-term potential of HSAs, you can take advantage of the following tools to increase usage and contributions:
- Ability for employees to enroll in an HSA at any point in the year
- Automatic enrollment in an HSA (with opt-out option)
- Automatic escalation of HSA contributions (with opt-out option)
- Employer matching contribution
- Customizable decision tools to help employees understand the potential benefits based on their age, health, salaries, expenses and other important factors.
As the employer, you also benefit from HSA participation because you don’t pay Federal Insurance Contributions Act taxes on employee pretax contributions. You could use some of these savings to provide additional contributions or education on HSAs.
Making better use of HSAs
Retirement health care is expensive. HSAs offer a valuable way to prepare.
To help your employees take advantage of HSAs, talk with your insurance broker or benefits adviser. They can assist you with HSA plan design, participation and communication.