US companies have embraced health savings as a benefit for employees in recent years. Many businesses are increasingly looking at HSAs as plan developers were intended — as health care spending vehicles that allow consumers to save for health care expenses on a tax-advantaged basis.
That premise sounds so good that US consumers now have more than $100 billion held in HSAs, representing the highest funding point since health savings accounts launched in 2003.
“The reason HSAs are so popular and powerful is that they have triple tax benefits; you get a tax deduction for putting money in, it grows tax-free and comes out tax-free if used for medical expenses,” says Childfree Wealth founder Jay Zigmont.
The main 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 because you may be able to choose a better health care plan without an HSA,” says Zigmont.
More Like a 401k?
As interest grows in triple-threat long-term savings accounts, US employers are increasingly positioning their HSA accounts as a key component of their long-term employee retirement strategies.
According to the Plan Sponsors Council of America’s (PSCA) 2022 Survey of Health Savings Accounts, sponsored by HSA Bank, investment-oriented retirement plans are beginning to influence the design of HSA programs.
“Most notably, half of large employers — and more than one-third of all respondents — indicated that they do or will place HSAs as part of a retirement savings strategy for employees,” said the PSCA survey of about 450 employers.
One sign that companies are leaning toward the savings aspect of HSA plans is the auto-enrollment numbers, which are increasing.
“40% of respondents are using automatic registration – up from 35.3% in 2020 and 32.2% in 2019,” the study reported. “Opening an HSA automatically and enrolling employees dramatically increases savings rates.”
This figure includes more than half of small organizations that automatically open an HSA for employees when they enroll in an HDHP. “Additionally, 57.2% allow transitions from HSAs for newly hired employees, and 62% percent educate and encourage transitions from other HSAs — steps that support the growth of these savings accounts,” the PSCA report states.
Financial experts say that health savings accounts are already used as retirement savings plans, especially for medical expenses.
“In this way, both are health care savings vehicles 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 method
Companies seem so confident in HSA plans, they’re looking for other ways to optimize plans for employees — including with more retirement investment philosophies.
“Everything seems to be trending in how to invest in retirement with an HSA,” says Brian Haney, founder of The Haney Company. “With increasing pressure and recent legislative emphasis to help Americans retire successfully, coupled with medical and insurance market trends are encouraging consumers to recognize the need to share more of the burden of care costs.”
“For that reason, HSA accounts should continue to grow significantly,” Haney said. “There are certain advantages to putting money into these accounts, including investment income and favorable tax treatment.”
In many ways, HSAs are already considered by many to be a type of alternative retirement plan.
“Various studies provide details on the cost of medical care in retirement,” said Benefit Resource vice president of strategy Becky Seefeldt. “The HSA, based on the details previously provided, is provided as 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 its ability to be a long-term savings vehicle or a pass-through account or a short-term tax-advantaged expense,” says Seefeldt.
Employers can help employees save money to pay for health care in retirement instead of draining the 401k account for qualified medical expenses.
“When you take money out of a 401k in retirement to pay for qualified medical expenses, you’re subject to paying ordinary income taxes,” Seefeldt says. “If you build a larger balance in an HSA, you never pay a cent in taxes on the way in, and more importantly a cent on the way out if used for qualified health expenses.”
How to Get the Most Out of Your HSA Plan
To optimize your HSA experience, go ahead and treat management like you would a 401k plan.
“The best advice is the same I recommend for any retirement plan,” says Brian Haney, founder of The Haney Company. “Start early, save as much as you can, and work hard by strategically setting aside funds in a consistent manner over time.”
The earlier you start, the bigger the amount you’ll have when you retire, Haney says.
“Whether you use the funds for medical expenses or not, you will not be disappointed because the funds are there for you when you need them the most,” he said.
Also, focus on getting the right plan manager as well.
“Look for a reputable HSA provider with low fees, excellent service and a choice in the type and breadth of investment options available,” says Seefeldt.