The HSA: A retirement benefit in disguise?

In the midst of trying to understand health insurance options during open enrollment, employees often miss a powerful benefit – health saving accounts (HSAs). Based on Conduent data from 200,000 employees, 43% of eligible employees don’t participate in HSAs. And of those that do, 57% aren’t capturing the full savings because their contributions are significantly less than the maximum ($3,650 for individuals and $7,300 for families, increasing to $3,850 and $7,750 respectively in 2023). And like a 401(K), there is a $1,000 catch-up provision for participants who are age 55 or over.

Employees aren’t taking advantage of the HSA because in general there hasn’t been enough education about them. It took time but employees now understand the benefits of a 401(k) and how to participate. Part of the challenge is that HSAs have different applications depending on life stage and needs, and the tax implications and intricacies might feel overwhelming. There is a huge opportunity to educate employees on how to strategically utilize HSAs and reap the most benefits.

HSA basics

HSAs are tax-advantaged medical savings accounts available to employees enrolled in a high-deductible health plan. HSAs are employee-owned accounts, and the funds in the HSA belong to the employee. Unlike other benefits, employees can enroll in an HSA at any time in the year, even outside of open enrollment.

The more well-known use of HSAs is to pay for day-to-day medications, including qualified over-the-counter items and other medical expenditures using tax-deductible funds placed in the account. However, the often-missed opportunity is to use HSAs as a retirement tool; the account is in fact a 401(k) in disguise. A key advantage over a 401(k) is that HSAs are the only savings vehicle that enjoy a triple-tax benefit i.e., withdrawals for qualified medical expenses are tax-free.

HSA as investing opportunity for retirement

HSAs can be used for immediate health care needs, but they are also a great vehicle for allocating tax-free funds for health care after retirement, when medical needs may increase over the years. However, after the age of 65, the HSA becomes a 401(k) and is not limited to medical expenses. HSA investing works like a 401(k) because an employee can select a variety of retirement savings solutions, such as target date strategies and low-cost investments, with the net result being the HSA is supplemental retirement income. After the age of 65, a retiree can withdraw money from the HSA to use on any type of expense, penalty-free, though non-medical ones are taxed at the income tax bracket.

Related: HSAs and 401(k)s – better together? What advisors need to know

While less common, employees, who are exceptional at planning and receipt-keeping, in theory, can hold on to receipts for all the eligible medical expenses occurred, while contributing to an HSA, and reimburse themselves at a later date for all of those expenses. For example, if you have the receipts for $50,000 worth of medical expenses incurred over the course of several years, you could take $50,000 out of your HSA tax-free. It requires planning for your medical expenses now and deciding which funds to use at what time in your savings strategy. And that $50,000 you have tax-free out of your HSA, you can spend how you want. As long as you didn’t take another tax break on those medical expenses, the money you paid into an HSA is tax-free.

Companies can help their employees understand HSAs and their benefits

Just as companies decided to focus efforts to increase employee participation in 401(k)s, employers can help drive awareness and increased use of HSAs.

Some of the ways companies are doing that include:

• Auto enrollment for employees with a HDHP into an HSA and funding a contribution.
• Take a lesson from the 401(k) plan and set a benchmark for a contribution.
• Increase employee understanding of benefits with always-on benefits communication, particularly at the time of need in their life.
• View HSAs as a retirement tool and a health savings tool rather than exclusively as a medical benefit, repositioning HSA benefits among other wealth and retirement benefits to lower barriers to adoption.

While HSAs are a relatively lesser-known benefit compared to others, their versatility and strategic usage can provide an employee with a significant financial upside. HR teams need to break down silos between health & welfare and retirement teams to have holistic conversations about benefits and take a fresh look at how they position HSAs and support education around them.

John Larson is a Vice President at Conduent supporting clients with their Health & Welfare, Retirement and HSA/HRA administration.