US companies have come to embrace health savings as an employee benefit in recent years. Many businesses increasingly see HSAs as plan developers intended — as a health care spending vehicle that allows users to save for health care expenses on a tax-advantaged basis.
This condition has been so good that US consumers now have more than $100 billion held in HSAs, representing the highest funding point since health savings accounts were launched in 2003.
“The reason HSAs are so popular and powerful is because they have a triple tax benefit; you get a tax deduction for putting money in, it grows tax-free and it comes out tax-free if it’s used for medical expenses,” said 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,” Zigmont said.
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More like a 401k?
As interest grows in a triple-threat long-term savings account, US employers are increasingly positioning HSA accounts as a key component of their employees’ long-term 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 design.
“On average, half of large employers — and more than a third of respondents overall — indicate they do or will position HSAs as part of a retirement savings strategy,” said the PSCA survey of about 450 employers. for employees.
One sign that companies are leaning into the savings aspect of HSA plans is the number of automatic enrollments, which are increasing.
“40% of respondents are using automatic registration – 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 the small organizations that automatically open an HSA for their employees when they enroll in the HDHP. “Additionally, 57.2% allow rollovers from HSAs for newly hired workers, and 62% percent educate and encourage rollovers from other HSAs — moves that support growth in these savings accounts,” the PSCA report stated.
Health savings accounts are already being used as retirement savings plans, especially for medical expenses, financial experts say.
“In that way, they are both a health care savings vehicle and a retirement savings vehicle,” 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 bullish on HSA plans, they’re finding other ways to optimize their plans for employees — including with more of a retirement investment philosophy.
“Things seem to be trending in the way of retirement investments and HSAs,” says Brian Haney, founder of The Haney Company. “With growing pressures and recent legislative emphasis on helping Americans retire successfully, as well as trends in the medical and insurance markets to encourage consumers to recognize the need to share more of the cost of care.”
“For these reasons, HSA accounts should continue to grow in prominence,” Haney said. “There are some advantages to putting money in these accounts, such as investment earnings and favorable tax treatment.”
In many ways, HSAs are already considered by many to be an alternative type of retirement plan.
Becky Seefeldt, vice president of Benefit Resource Strategy, said: “Study piles detail the cost of medical care in retirement. “An HSA, according to the details previously provided, is set up as a retirement plan designed to cover medical expenses. at retirement, but can be used at any time the account holder’s financial situation warrants.”
“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 expense account” Seefeldt noted.
Employers can help employees pool dollars to pay for health care in retirement instead of draining a 401k account for eligible medical expenses.
“When you take money out of a 401k for retirement to pay for eligible medical expenses you are subject to paying ordinary income taxes,” Seefeldt said. “If you build a larger balance in the HSA you never pay a penny in taxes down the road, and more importantly a penny down the road if used for eligible health expenses.”
How to get more from 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 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 and set money aside strategically in a consistent way over time.”
The earlier you start, the more money you’ll have in retirement, Haney noted.
“Whether you use the money for medical expenses or not, you won’t be disappointed that the money is there for you when you need it most,” he said.
Additionally, focus on finding the right plan manager as well.
“Find a reputable HSA provider with low fees, excellent service, and the choice of quality and breadth of investment options available,” Seefeldt said.
