Employees don't "get" HSAs -- what's an employer to do?
Health savings accounts are often not used to their full tax-advantaged potential. But employers can help.
With health care costs continuing to rise, employers have increasingly settled on high deductible health insurance plans (HDHPs) as a way to keep their health expenditures in check, with more than half of the U.S. workforce enrolled in one. Along with the HDHPs, more employees are also enrolled in health savings accounts (HSAs), which can be paired with HDHPs to pay for qualifying medical costs in a tax-advantaged way.
Though they are used primarily for health care-related costs, the tax advantages are so generous in HSAs that financial experts wish employees would start thinking of them as both a source of money for current medical expenses and a potential way to pay for retirement health spending.
“Most people don’t realize that Medicare does not cover everything,” says Kim Buckey, vice president of client services at DirectPath, a benefits education and enrollment transparency company. “Employers could definitely be doing more to prepare people” for retirement health costs, Buckey says.
HSAs could be used to pay for retirement health care costs if employees used them strategically, Buckey says. A 65-year old couple retiring today can expect to shell out $300,000 for health care not covered by Medicare, according to the Fidelity Retiree Health Care Cost Estimate. It’s a retirement expense worth saving for.
Triple tax-free advantage
Of the various saving vehicles available to employees, HSAs are probably the most attractive from a tax perspective. They are tax-free in three ways: Contributions are made pre-tax, the money in the accounts grows tax free, and withdrawals for the qualified medical expenses are also tax free.
At age 65, HSA account holders can make withdrawals for any reason without incurring a penalty, though withdrawals that are not for medical expenses are taxed as ordinary income.
What’s more, money in the HSA can be invested when the HSA is tied to a brokerage account, so it could potentially grow even more.
“If you are a young worker that can fully fund the HSA and not spend it, you could easily get it to $100,000 to $200,000 by retirement,” says Dan Mathews, a certified financial planner and director of financial planning with Creative Planning Inc.
To optimize the use of HSAs, employees should be thinking about these accounts alongside their 401(k)s, advisors like Mathews believe. For example, they could max out their contributions, which for 2022 will be $3,650 for single tax filers and $7,300 for families. (Those over age 55 can contribute an additional $1,000.) Then, they can pay for medical care out of pocket, rather than tapping HSA funds. Finally, they can invest the assets in securities with long-term growth prospects to boost the balance even more.
“The investment choices are better now and costs have also come down for HSA brokerage accounts,” says Nathan Voris, director with Schwab Retirement Plan Services.
More employers, says Voris, are recognizing the potential for HSAs to help retirees pay for health care expenses and are spending time to make sure they are structured well and include an appropriate menu of investments.
Employee confusion
For all the potential benefits of HSAs, however, they are still under-utilized. Employees often confuse them with flexible savings accounts, or FSAs, which have been around much longer. “It’s too bad that the names are so similar,” says Buckey. “It leads to a lot of confusion.”
Many employees may erroneously believe that like an FSA, the funds in an HSA must be used within the calendar year, otherwise they’re forfeited. (They are not.)
In addition, HSAs are often positioned alongside an employer’s health insurance offerings as a way to pay for health care spending. It’s therefore not surprising that 86% of funds in HSAs are used for medical expenses in any given year, according to Lively, an HSA provider which polled 25,000 of its users.
“For many people, it’s easier to use the HSA debit card, so it doesn’t hit their bank accounts,” says Mathews.
The good news is that there’s been an uptick in HSA adoption. According to Devenir Research’s 2021 Midyear HSA Research Report, the number of HSA accounts grew to 31 million in June, a 6% increase from the year prior.
What can employers do?
Greater adoption of HSAs could be made possible with more targeted campaigns by employers.
“It’s important for employers to understand that employees do primarily look at HSAs as spending accounts and meet employees where they are and help them spend optimally along their HSA journey,” says Lisa Myers, client delivery team leader with Willis Towers Watson.
In an email to its clients, Willis Towers Watson recently shared a potential strategy to encourage employees to make contributions to the HSA: An HSA match within the 401(k).
For contributions to their HSAs, employees can receive an employer 401(k) match, so they won’t miss out on the match by making HSA contributions.
The idea is a twist on a similar strategy some employers use with student loan repayments. In a private letter ruling in 2018, the IRS allowed Abbott Laboratories to make 401(k) matching contributions on a portion of employees’ student loan repayments.
“We’re going to see HSAs play an increasingly large role to meet people’s retirement needs,” says Myers. “But we need better tools to help employees make decisions about their HSAs.”
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