US companies have come to accept health savings as a benefit for employees in recent years. Many businesses are increasingly seeing HSAs as intended by plan developers — as a health care spending vehicle that allows users to save for health care expenses in a tax-advantaged manner.
This premise was so sound that US consumers now have more than $100 billion in HSAs, representing the highest funding since health savings accounts were introduced in 2003.
“The reason HSAs are so popular and powerful is because they have triple tax advantages; You get a tax deduction for keeping the money, it’s tax-free and it’s tax-free when used for medical expenses,” says 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 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,” says Zygmont.
More like a 401k?
As interest rates for a triple-threat long-term savings account continue to rise, U.S. employers are increasingly positioning their HSA accounts as a key component of their long-term employee retirement strategies.
According to the Plan Sponsor Council of America’s (PSCA) 2022 Health Savings Account Survey sponsored by HSA Bank, investment-based retirement plans are beginning to influence HSA program design.
“Most notably, half of large employers — and more than a third of respondents overall — indicate that they have or will have HSAs as part of employees’ retirement savings strategies,” said the PSCA survey of nearly 450 employers.
One sign that companies are turning to the savings side of HSA plans is the number of automatic enrollments, which are increasing
“40% of respondents use automatic enrollment – up from 35.3% in 2020 and 32.2% in 2019,” the survey reported. “Automatically opening an HSA 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. “In addition, 57.2% allow rollovers from HSAs for newly hired employees, and 62% educate and encourage rollovers from other HSAs — steps that support the growth of these savings accounts,” the PSCA report said.
Health savings accounts are already being used as retirement savings plans, especially for medical expenses, financial experts say.
“That way, they’re both a health care savings vehicle and retirement savings,” Zygmont said. “The bottom line is that the tax benefits for HSAs are better than for Roths or traditional retirement savings plans.”
The IRA Way
Companies seem so enthusiastic about HSA plans, they’re looking for other ways to optimize plans for employees — including a retirement investment philosophy.
“Things are definitely looking up in the way of retirement investing with HSAs,” says Brian Haney, founder of The Haney Company. “With increasing pressure and recent legislative emphasis to help Americans retire successfully, trends in medical and insurance markets are encouraging consumers to recognize the need to share more of the burden of care costs.”
“For this reason, HSA accounts should be prioritized,” Haney said. “There are some advantages to keeping money in these accounts, including investment earnings and favorable tax treatment.”
In many ways, HSAs are already considered by many as an alternative type of retirement plan.
“Numerous studies provide details on the cost of medical care in retirement,” says Becky Seifelt, vice president of strategy for Benefits Resources. “An HSA, as detailed previously, is set up as a retirement plan designed to cover retirement medical expenses but can be used at any time as the account holder’s financial situation warrants.”
“The beauty of an HSA is that it can be both a long-term savings vehicle or a short-term tax-advantaged pass-through or spending account,” notes Seefeld.
Employers can help employees stack up dollars to pay for retirement health care instead of dipping into a 401k account for qualified medical expenses.
“You pay ordinary income tax when you take money out of a 401k in retirement for qualified medical expenses,” says Seefeldt. “If you build up a large balance in an HSA, you don’t pay a penny of tax on the way in, and more importantly, you don’t pay a penny on the way out when used for qualified health expenses.”
How to Get the Most Out of Your HSA Plan
To optimize your HSA experience, go ahead and treat the management aspect like your 401k plan.
“It’s the best piece of advice I’d recommend for any retirement plan,” says Brian Haney, founder of The Haney Company. “Start early, save as much as you can, and be intentional about strategically setting aside funds in a consistent manner over time.”
The sooner you start, the more money you’ll have in retirement, Haney points out.
“Whether you use the fund for medical expenses or not, you won’t be disappointed that the fund is there for you when you need it most,” he said.
Additionally, focus on getting the right plan manager.
“Find a reputable HSA provider with low fees, excellent service, and choice in the type and breadth of investment options available,” says Seefeldt.