American companies have embraced health savings as a benefit for employees in recent years. Many businesses view HSAs as intended by plan developers—as a health care spending vehicle that allows users to save for health care expenses on a tax-advantaged basis.
That premise has held up so well that American consumers now have 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 when you keep the money, it’s tax-free and it’s tax-free when you use it for medical expenses,” said Jay Zygmont, 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 over an HSA may not be a good idea because you may be able to choose a better health care plan without an HSA,” Zigmont said.
More like a 401k?
As interest in the triple-threat long-term savings account grows, American employers are increasing their HSA accounts as a key component in their long-term employee retirement strategies.
Investment-oriented retirement plans are beginning to influence HSA program design, according to the Plan Sponsors Council of America (PSCA) 2022 Health Savings Account Survey sponsored by HSA Bank.
“Most notably, half of large employers – and more than a third of respondents overall – indicate that they do or will keep an HSA as part of a retirement savings strategy for employees,” said the PSCA survey of nearly 450 employers.
One sign that companies are leaning toward the savings side of HSA plans is the number of automatic enrollments, which are on the rise.
“40% of respondents use automatic enrollment – up from 35.3% in 2020 and 32.2% in 2019,” the study reported. “Automatically opening HSAs and enrolling employees dramatically increases savings rates.”
This figure includes more than half of small organizations that enroll in an HDHP when they open an HSA for employees. “Additionally, 57.2% allow rollovers from HSAs to 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 said.
Finance experts say health savings accounts are already being used as retirement savings plans, especially for medical expenses.
“In that way, they’re both a health care savings vehicle and a retirement savings,” Zygmont said. “The bottom line is that the tax benefits for HSAs are better than Roths or traditional retirement savings plans.”
Companies seem so excited about HSA plans, they’re looking for other ways to customize plans for employees — including a retirement investment philosophy.
“Things are definitely looking up for retirement investing with HSAs,” said Brian Haney, founder of The Haney Companies. “With increased pressure and recent legislative emphasis to help Americans retire successfully, medical and insurance market trends encourage consumers to recognize the need to share more of the burden of care costs.”
“For those reasons, HSA accounts should continue to grow in prominence,” Haney said. “There are some advantages to keeping money in these accounts, including investment income and favorable tax treatment.”
In many ways, HSAs are already considered by many to be an alternative type of retirement plan.
“Numerous studies provide details about the cost of medical care in retirement,” said Becky Seefeld, vice president of strategy at Benefit Resources. “An HSA, as described previously, is set up as a retirement plan designed to cover medical expenses in retirement but can be used at any time when the account holder’s financial situation may warrant it.”
“The beauty of an HSA is 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 qualified medical expenses.
“When you take money out of a 401k in retirement to pay for qualified medical expenses you have to pay ordinary income tax,” Seefeldt said. “If you build up a large balance in an HSA you won’t pay a dime in taxes on the way in, and more importantly if used for qualified health expenses you won’t pay a dime on the way out.”
How to Get the Most Out of Your HSA Plan
To optimize your HSA experience, go ahead and treat the administration aspect like you would a 401k plan.
“The best advice is what I 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 allocating funds in a consistent way over time.”
The sooner you start, the more money you’ll have when you retire, Haney noted.
“Whether you use the funds for medical expenses or not, you won’t be disappointed that the funds are there for you when you need them,” he said.
Additionally, also focus on getting the right plan manager.
“Look for a reputable HSA provider with low fees, excellent service, and choice in the type and breadth of investment options available,” Seefeldt said.