HSAs can help your employees long after they leave your company
An HSA provides a powerful tool, but this subject is complex, and the cost of coverage is not transparent.
Although employer-funded health insurance usually ends with retirement, the demand for health care does not. The average retiree will have costs of $5,000 to $6,000 per year even after considering the services covered by Medicare.
“Employers will play an essential role by helping employees determine their health-care costs in retirement, understand different retirement health-care options and create an appropriate savings plan that fits their individual needs,” according to a new report from Willis Towers Watson.
“Those who start saving early in their career (over 25 to 30 years) can fund the full cost of health care in retirement but may limit their ability to cover current year out-of-pocket costs or fund a significant health care event before retirement. Those who start saving later in their career are restricted by limits on HSA contributions that limit their ability to fund the full cost of health care in retirement.”
A man who retires at age 65 in 2020 and lives until age 85 will spend approximately $140,000 on health care in retirement (excluding dental and vision care).
How can retirees finance this lifetime cost for health care after they retire? An HSA provides a powerful tool, but this subject is complex, and the cost of coverage is not transparent. Employees need education and decision-support tools to help them connect the amount they need to save with the cost of health care in retirement.
Employees need to understand that most of the costs of health care in retirement can be covered by an HSA on a tax-free basis.
This means that, essentially, the money deposited into an HSA is never subject to federal income taxes when deposited into the account; the earnings on the growth in the account are not taxed; and the contributions and earnings are not subject to federal income taxes when withdrawn from the account to pay eligible health-care expenses.
Medicare supplement, dental and vision plan premiums can be paid from the HSA after paying taxes on the withdrawal. These taxes can be avoided, however, if the HSA owner has previously unreimbursed eligible health expenses that can be “cashed in” tax-free in retirement.
In other words, if after saving their HSA dollars retirees have paid some other health-care costs outside the HSA, those receipts later can justify taking money out of an HSA on a tax-free basis to pay for other things that would not otherwise be payable with tax-free dollars.
Using HSA funds to pay for noneligible expenses such as Medicare supplement premiums is not tax-free, but there are no penalties. For such expenses incurred after age 65, withdrawing the money from an HSA is equivalent to withdrawing money from a standard 401(k) plan. An excise tax of 20 percent does apply to nonqualified withdrawals from an HSA before age 65.
Employees who begin saving early with an HSA can accumulate enough assets to fund health care in retirement; however, it may be unrealistic to think that an employee will be in an HSA-qualified plan for the 25 to 30 years necessary to accumulate these assets. Because of this, many employees will not be able to fund health care from one source and will need help making the money last through retirement.
Because different plans have different cost levels depending on health status, the choices a retiree makes in selecting a plan can have a substantial impact on the total cost of health care, thereby affecting the amount of savings needed to cover health care during retirement.
“Saving for retirement is a long-term proposition that requires the discipline to devote resources at an early age and the wisdom to select accounts that will best meet one’s needs,” the report concluded.
“As employees embark on this journey, it is important to understand that options exist not only to save for general retirement expenses but also to save specifically for health care in retirement. An HSA offers clear advantages and can play a critical role in saving for retirement health care. HSAs may not be right for all, but all employees eligible to use them would be wise to consider the power of their benefits when developing their retirement funding strategy.”
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