Health Savings Accounts: An underutilized tool for long-term financial wellness

Among COVID-19’s many impacts, the pandemic underscored anew the tension that can arise when employees, especially younger ones, need to choose their workplace health plan option:  How to secure affordable health care coverage that also offers sufficient protection against unforeseen, potentially weighty out-of-pocket healthcare expenses?

For many employees, the answer can reside in an often-overlooked benefit built into high-deductible healthcare plans (HDHPs): the health savings account (HSA).  In fact, for employers and employees alike, HSAs offer compelling advantages when it comes to cost effective healthcare – with the striking added benefit that an HSA can even help enhance retirement financial security.

At a time when quality health and retirement benefits are more important than ever in marking employers of choice, sponsors should review how they are positioning an HSA offering, to ensure that employees correctly view the HSA as a highly appealing vehicle to cover healthcare costs — but also as a useful tool for building overall financial wellness, well into retirement.

Some potent selling points

Let’s start with the basics – and the HSA’s most potent selling points for employees:

Available only through a qualified high-deductible health plan (HDHP), an HSA provides for coverage of out-of-pocket costs for qualified medical expenses (QMEs), regardless of the account holder’s income.  Contributions to the HSA can be made by anyone on behalf of an eligible individual – including the eligible employee, employers, or even relatives.  When made through a Section 125 “cafeteria” plan, contributions are pre-tax including pre-FICA; earnings on the HSA balance grow tax-free, and, assuming the HSA balance is withdrawn to cover IRS-qualified medical expenses, the withdrawals also are tax-free.

HSAs have a key difference from flexible spending accounts (FSAs)1:  the unspent HSA balance can be carried over from year-to-year, enabling employees to grow their balance over time. [Note: The Consolidated Appropriations Act (CAA) of 2021 is an optional provision whereby employers can amend their Section 125 cafeteria plan to allow health FSA participants to rollover unused amounts from 2021 to 2022.]

To help boost that longer-term growth potential, most HSA administrators will allow HSA members to allocate contributions to mutual funds or a brokerage account once their balance reaches  a certain threshold (e.g., $1,000). 

There’s more:  HSAs are owned by the individual and are portable for the employee from employer to employer.  And, in the event of the HSA member’s death, the balance is payable to a beneficiary.

Allocating premium savings toward covering costs   

For both employees and employers, an HSA’s cost benefits are an impressive feature.  An HSA member can take what they’re saving on their HDHP premium payment from each pay check (compared with a first dollar coverage plan) and allocate those dollars toward their HSA, building their ability to readily pay for out-of-pocket medical expenses at any time.

Employers also realize a cost saving rooted in lower FICA taxes and HDHP premiums.  And because HDHP participants are accountable for their plan’s higher deductibles, they may be more inclined to “shop” for less costly healthcare solutions, which can reduce the employer’s overall health plan costs as well. 

For the employer, these savings can free up benefit dollars that can be redirected into an employee’s HSA, as a further spur to employee participation.

Lending a hand with retirement healthcare costs

Younger employees are embracing HSA-qualified plans due to the more easily affordable premiums as well as peace of mind rooted in the ability to shift their savings toward otherwise-uncovered medical expenses.

But the HSA member’s ability to carry over an unspent balance from year-to-year, to save up over time to help cover out-of-pocket health costs in  retirement, is one of the most meaningful, yet underutilized, HSA benefits.

When an HSA member reaches retirement age, generally 65 and if they don’t need their HSA for healthcare costs, they can use the funds for expenses other than healthcare.  Especially if they have a good system for saving up their healthcare receipts since the inception of their HSA, they can withdraw tax-free from the HSA at 65 assuming the amount of the withdrawal is equal to their healthcare receipts that have been saved up over time.  

However, for many people, rising healthcare costs, especially in retirement is exactly the use for which they should reserve those funds.  Indeed, providing retirees some extra help with healthcare expenses is no small consideration — given that so many people remain challenged just by the exercise of building sufficient savings to cover their basic needs and lifestyle costs in retirement.

There is clearly a need.  According to one study, nearly half (45%) of adults age 50 to 64 have low confidence that they would be able to afford health insurance during retirement.  And the prospective costs are truly daunting: In a recent study, the Employee Benefit Research Institute (EBRI) estimated that, to cover premiums and median prescription drug expenses in retirement, a 65-year-old man would need $73,100 in savings and a 65-year-old woman would need $95,000 – simply to ensure a 50/50 chance of having enough.   For the same 50/50 certainty, a couple with median prescription drug expenses would need $168,000 in savings.  And the prospective cost of even greater certainty is dramatically higher.  An HSA balance built over an individual’s employment can help meet those expenses.      

Reinforcing the HSA’s long-term appeal

No question – HSAs have the potential to do an HSA member a world of good, throughout their working years and well into their retirement years.  How to help employees take full advantage?

First, reconsider how – and literally where – the HSA is positioned within your benefits offering.  Many employers bury the HSA benefit information deep within their overall medical plan benefit.  If that’s the case with your health plan, give the HSA more of a showcase and greater visibility within your benefit information and communications.  Encourage your employees to give the HSA close consideration and make sure the associated explanatory information is robust enough to address their initial questions and pique their interest in learning more. Another best practice is to educate employees throughout the year about the benefits of their HSA.  Many employers only provide HSA education and information at the time of the benefit election period.  To best engage employees, employers can work with their HSA administrator or retirement plan providers to provide HSA education throughout the year to help employees build their HSA knowledge over time.  

Then, be sure to put a long-term “spin” on the HSA’s benefits, with a focus on retirement advantages.  Make clear the HSA’s immediate benefit:  a triple tax-advantaged way to cover today’s out-of-pocket medical expenses.  But don’t neglect to also position the HSA as a triple tax-advantaged “savings” tool that can significantly extend retirement plan benefits.  Tee up with employees the power of saving up their HSA balance over their working career, to the extent that they can, to help cover their retirement medical expenses vs. spending down their entire HSA balance each and every year.  With many employers no longer able to fund traditional retiree medical benefits, this point should strongly resonate with employees.      

HSA-qualified high deductible health plans are gaining traction and, as more employees become familiar and have experience with the benefit, more will look for an HSA as a standard offering when choosing an employer or switching jobs.  Positioned properly, an HSA can be a valuable lever for employee recruitment, retention and retirement support, and also for strengthening the competitive appeal of your overall health and financial wellness offering – to say nothing of helping to ease the concerns of employees considering how to cover a healthcare cost “surprise.”

Kendra Smith is on the TIAA Health Solutions team and is responsible for the sales, distribution and development of the TIAA HSA.  She is a seasoned financial services professional with expertise in retirement plan and HSA design to improve employee outcomes.  Kendra’s passion is to educate plan sponsors and their employees about HSA benefits to cover health care costs to and through retirement.