INDIANAPOLIS — Although health savings accounts (HSAs) have been around since 2005, they're an often under-used tool for managing health care costs. Many employees don't understand their value or how to use them effectively.
But employers should consider positioning health savings accounts as another wealth-building tool to help employees save for retirement, suggested Cris Ruiz, vice president, UMB Healthcare Services. Ruiz presented a session, "Using a Health Savings Account to Build Long-Term Wealth" at the annual BenefitsPRO Broker Expo.
As Ruiz explained, an HSA is an individually owned, tax-advantaged account that you can use to pay for qualified medical expenses, save for retirement and long-term care expenses, or invest. A major benefit of the HSA is that the funds can carry over from year to year, and any funds not spent can accumulate, like any other savings account. Many HSA providers offer investment options, in addition to simple savings accounts, Ruiz pointed out.
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With these investment options, employees can allocate funds to immediate needs and to longer term investment vehicles. A 30-year-old employee who puts away $3,000 per year and earns a return of 5 percent can accumulate quite a nest egg over 30 years—even if a certain portion is pulled out to pay medical expenses.
Benefits of HSAs
Employers may benefit from lower health insurance premiums as a result of implementing HSAs. In some cases, smaller employers that didn't offer health insurance benefits because of cost may find it more attractive to offer HSAs, improving recruiting and retention.
An HSA is especially beneficial when employees reach age 65 and become eligible for Medicare, Ruiz said. While the employee is working, the funds in the HSA are used to pay medical expenses at no tax cost. After age 65, when Medicare pays medical costs, employees can use the funds to pay for other expenses, and only pay taxes on the funds withdrawn at ordinary income rates—which should be lower than in the employee's working years. "You can use the HSA dollars to pay for the lovely nurse who will be pushing your wheelchair," she explained.
There are two additional key benefits that employers need to explain to employees: no income limits and no required distribution. Unlike 401(k)s or other retirement plans, employees are not limited by their income levels to how much they can save, and there are no required minimum distributions when an employee reaches age 70-1/2.
When asked how to best reach employees, the employee benefits industry has to do a better job of educating the public, Ruiz said. "One size does not fit all, and one message doesn't reach all listeners." She suggested employers enlist the aid of their human resources teams and benefits specialists to segment the employee population by characteristics. "Hold small focus groups," she recommended, "and include potential influencers or early adopters." It may take baby steps, but employers are seeing increased in adoption rates.
Providing incentives
Ruiz also noted employers might have to bring in financial services experts to help explain the concept of tax savings to employees to encourage their enrollment in HSAs. Tax savings is a concept that's not well understood by most people, she said, and when employees only see a minor difference in premiums, it's difficult to convince them to enroll in HSAs.
Employers should consider providing initial seed contributions, matching contributions or other incentives to save, Ruiz said.
"What about the first year of an HSA?" one audience member asked. Often, employees are hesitant to sign up for the HSA fearing they'll have a major medical expense in the first couple of months of the first year that they have an HSA and won't have the dollars set aside to meet extensive medical costs.
"The first thing to understand is that medical providers will work with patients to set up payment plans," Ruiz explained. Employees can then use the HSA to fund the payments tax-free. As an alternative, employees can pay the expenses out of pocket, then reimburse themselves from the HAS—even over several years. "There are ways to make HSAs work, even in this scenario." Ruiz pointed out.
When employers understand the benefits for themselves and their employees, HSAs can be a win-win for both sides, helping employees manage current medical costs and building long-term retirement savings.
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Rosalie Donlon
Rosalie Donlon is the editor in chief of ALM's insurance and tax publications, including NU Property & Casualty magazine and NU PropertyCasualty360.com. You can contact her at [email protected].
