Beyond health care: Helping employees maximize their HSAs for long-term savings

With assets climbing to over $98 billion as of mid-year 2022, Health Savings Accounts (HSAs) have cemented their place as an important tool to help employees meet their health care spending needs. Their unique tax advantages and flexible withdrawal options also make them an integral retirement savings vehicle – one that, when used properly, can add a significant boost to an employee’s retirement readiness.

But understanding of the account’s value, especially beyond immediate medical savings, remains a barrier to utilization. A recent survey by the Plan Sponsor Council of America showed that nearly 80% of plan sponsors need help educating employees about HSAs and their multifaceted benefits.

For 2023, HSA contribution limits have been raised to $3,850 for individuals and $7,750 for families (with an additional $1,000 per year catch-up contribution for those age 55 or older). With even more savings potential at stake, driving workforce awareness of this under-utilized tool is critical.

HR teams should emphasize three key benefits when educating employees to better understand and maximize their HSAs:

1. Triple tax benefits. Employee contributions are pre-tax, which reduces their taxable income. Further, if they invest their HSA funds, their earnings from dividends and capital gains grow tax-free. They can then withdraw these funds for eligible medical expenses at any time – and the withdrawals are also tax-free.

2. Not a use-it-or-lose-it account. HSAs are not like Flexible Spending Accounts (FSAs). At the end of the year, unused funds carry forward and can be invested. Rather than using HSA funds to pay for current health care expenses, employees should consider paying out-of-pocket and saving their receipts. That way, the funds they put into their HSA can be invested and later withdrawn without a tax burden (provided they save their proof of qualified medical expenditures paid in previous years).

3. Powerful retirement savings tool. By maxing out their annual HSA contributions and investing the excess funds, an employee’s HSA can quickly become an important component of their retirement plan. If they retire before Medicare eligibility, they can use HSA savings to pay for medical expenses and insurance until they turn 65. Once an accountholder turns 65, HSA funds can be used for ANY purpose. Qualified medical expenses remain tax-free, and non-qualified expenses are taxed at ordinary income rates – just like pre-tax 401(k) withdrawals. This allows an employee’s HSA to act as an extension of their 401(k) savings plan. And, unlike 401(k)s, HSAs are not subject to minimum required distributions – meaning money can be left in the account – enabling the funds to continue growing throughout retirement.

Effective education in focus

At many companies, HSAs are only discussed once a year: when they are presented as a secondary component of a company’s high-deductible health plan during annual open enrollment. But helping employees truly comprehend HSAs and their benefits requires a more robust and dynamic approach to education.

Here are four strategies that can help HR teams drive HSA adoption and optimize utilization among their workforce:

1. Demonstrate health care costs in retirement. A recent survey from RBC Wealth Management found that the projected lifetime health care costs for a 65-year-old couple retiring in 2021 was over $660,000. Many employees underestimate the cost of health care, and an HSA can be a powerful vehicle to help address these future expenses. A formal education program that enlightens employees to the real costs of care and the exponential growth rate of medical expenses later in life can encourage employees to start planning for the future and improve HSA engagement.

2. Incorporate HSAs into retirement education program. Instead of holding separate education sessions on your firm’s retirement plan, integrate HSAs into a broader discussion of saving for retirement. Discussing HSAs beyond the context of medical benefits makes them a more frequent touchpoint for employees and increases awareness of their long-term savings power.

3. Incentivize participation. Employer contributions and wellness incentives can play a key role in driving HSA engagement. “Free” money is an attractive benefit that can go a long way in getting employees interested in learning about HSAs. Many companies link their employer HSA contributions to participation in workplace wellness programs. This can be a mutually beneficial way to reward employees for making healthy lifestyle choices that also encourages continued participation in both HSAs and company wellness initiatives.

4. Educate on investment capabilities. Investing is one of the best strategies to maximize an HSA’s tax-free growth, yet HSA investment menus are often overlooked. Only 2.4 million (about 7%) of the nearly 34 million HSAs nationwide have at least a portion of their savings invested – the rest remains in cash or cash equivalents. While some HSA owners opt not to invest their savings, many are unaware of the option. There is big gap between investment education programs for traditional 401(k)/403(b) accounts and those for HSAs. Along with education outlining the investment options available within your company’s HSA, consider demonstrating how participants can use bucket strategies to account for short, intermediate and long-term health care savings goals inside of their HSA.

Read more: HSAs: An important tool to combat economic uncertainty

With their flexibility and multi-layered tax advantages, HSAs have become an incredibly valuable tool for managing current and future health expenses, yet they remain under-utilized. Creative, ongoing efforts by plan sponsors and HR teams to highlight capabilities and drive engagement, along with integrating HSAs into overall retirement plan education, are critical to helping employees understand the significant advantages of HSAs and how to leverage them for long-term planning.

Chad Goerner, Senior Vice President – Financial Advisor and Corporate Retirement Director, RBC Wealth Management – U.S.

RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC. RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor.