In recent years, American companies have adopted health savings as a benefit for employees. Many businesses are increasingly viewing HSAs as the plan was intended by the developers—as a health care spending vehicle that allows users to save on health care expenses on a tax-advantaged basis.
That premise sounded so good that American consumers now have more than $100 billion in HSAs, the highest funding point since health savings accounts were introduced 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 the money in, it grows tax-free and 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 great idea because you may be able to choose a better health care plan without an HSA,” Zigmont said.
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More than a 401k?
As interest in the triple-threat long-term savings account grows, American employers are increasingly positioning their HSAs as a key component in their long-term employee retirement strategies.
According to the Plan Sponsor Council of America (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 — report making or placing an 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 auto-enrollment numbers, which are on the rise.
The study states: “40% of respondents use automatic enrollment – up to 35.3% in 2020 and 32.2% in 2019. “Automating HSA opening and employee enrollment dramatically increases savings rates.”
That number includes more than half of small organizations that automatically open an HSA for employees when they enroll in an HDHP. “Additionally, 57.2% allow transfers from HSAs for newly hired workers, and 62% percent educate and support transitions from other HSAs—steps that support the growth of these savings accounts,” according to the PSCA report.
Financial experts say health savings accounts are already being used as retirement savings, specifically for medical expenses.
“In that way, they’re a vehicle for health care savings 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 path
Companies seem to be so bullish on HSA plans that they are finding other ways to optimize plans for employees — including retirement investment philosophies.
“Things definitely seem to be moving toward retirement investing with HSAs,” said Brian Haney, founder of The Haney Company. “With increasing pressures and recent legislative emphasis on helping Americans retire successfully, coupled with a trend in the medical and insurance markets to encourage consumers to recognize the need to share more of the cost burden of care.”
“For these reasons, HSAs should continue to grow in importance,” Haney said. “There are some advantages to putting money into these accounts, including investment returns and favorable tax treatment.”
In many ways, HSAs are already considered by many to be an alternative type of retirement plan.
“Countless studies provide details on health care costs in retirement,” said Benefit Resource Vice President of Strategy Becky Seefeldt. “The HSA, as detailed above, is set up to be a retirement plan designed to cover medical expenses in retirement, but can be used at any time if the account holder’s financial situation requires it.”
“The beauty of an HSA is its ability to be a long-term savings vehicle or a short-term tax-advantaged pass-through or spending account,” Seefeldt noted.
Employers can help employees build up dollars to pay for health care in retirement instead of draining a 401k account for eligible medical expenses.
“When you take money out of your 401k in retirement to pay for eligible medical expenses, you’ll have to pay ordinary income tax,” Seefeldt said. “If you build up a larger HSA balance, you’ve never paid a cent in taxes on the way in, and more importantly, not a cent on the way out if it’s used for eligible medical expenses.”
How to Get the Most Out of Your HSA Plan
To optimize your HSA experience, go ahead and treat the administration page 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 try to put aside funds strategically and consistently over time.”
The earlier you start, the more money you’ll have in retirement, Haney noted.
“Whether you use these 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.
Additionally, focus on getting the right plan administrator.
“Find a reputable HSA provider with low fees, excellent service, and a selection of the type and breadth of investment options available,” Seefeldt said.
