Supporting employees’ retirement journey: The power of the HSA

One of the key conversations employers should have during open enrollment is how they can help employees secure their financial futures from the package of benefits they offer. It can be a key factor in how employees view the organization and their future in it.

A point of emphasis should be the advantages of health savings accounts (HSAs) and how they fit into a carefully planned, multi-pronged retirement strategy that combines government-sponsored Social Security and Medicare and employer-sponsored plans such as 401(k)s.

HSAs have unique savings and tax advantages that make them an important factor in developing a retirement strategy. Like a 401(k), employee contributions and any employer fundings are made with pre-tax dollars. Both are owned by the account holder, are portable and earnings over the life of the accounts are not taxable. The big difference is that money withdrawn from an HSA for IRS-qualified medical expenses is tax-free, whereas 401(k) withdrawals are taxed as regular income.

HSAs are unique and when used for a retirement purpose they can be the most advantageous account you can use for retirement savings because they offer the most flexibility and the most potential tax savings. And even if the funds contributed to an HSA are not used for qualified medical expenses, for people aged 65 and older, they are no more disadvantageous than any other qualified retirement account such as a 401(k) or IRA.

Although they’ve existed for 20 years, many consumers are relatively new to them and have only become familiar with their benefits in the past couple of years. Created by the 2003 Medicare Prescription Drug, Improvement and Modernization Act and conceived as a means for consumers to better manage their health care costs, HSAs have evolved into more than a way to pay for current medical expenses not covered by the high deductible health plans (HDHPs) with which they are coupled.

The 401(k), named for a section of the Revenue Act of 1978 that created it, is still viewed as a primary vehicle for company-sponsored retirement savings and today remains one of the most popular retirement savings options. The Plan Sponsor Council of America (PSCA) estimates that 62% of employers automatically enroll employees, giving employees the opportunity to opt out. American workers have a total of $7.3 trillion in 401(k) accounts, according to ICI Global.

HSAs held $115 billion in assets in June 2023, according to a Devenir Research estimate. That figure is projected to increase to more than $150 billion by the end of 2025. According to a Plan Sponsor Council of America (PSCA) survey of more than 450 large employers, half said that they promote HSAs as part of a retirement savings strategy to employees.

The HSA Bank 2023 Health and Wealth Index found that 33% of respondents are unsure how to cover medical expenses in retirement. Another survey found that only 12% of HSA holders are investing the money not used to cover medical bills for the future.

With estimates that a couple retiring today will need $674,000 to cover health care expenses over their remaining years, a figure that increases to $1.7 million for a couple in their mid-40s, employers can make a greater impact on their employees’ financial futures by automatically enrolling workers into HSAs and matching their contributions.

To overcome this and encourage employees to view their HSAs as a retirement savings option, benefits teams can develop education programs that help employees recognize that unused funds in health savings accounts can be invested as they accrue. Many benefits providers offer self-directed investment options that can help savings grow even more. (Employees can return HSA investments back to their HSA cash accounts at any time should they need them to cover medical expenses not covered by their HDHP.)

Related: Rethinking FSAs and HSAs to drive benefits participation and employer savings

Employers can further help their employees save for post-employment medical expenses by offering matching contributions. However, according to surveys, many employers have not yet adopted this strategy, primarily due to a lack of awareness that they can offer matching contributions to an HSA. Internal Revenue Service rules provide a tax incentive for employers’ contributions, which employers can use to encourage employees to make regular contributions to their HSAs, just as they do with a 401(k) plan.

In the end, employers need not ask employees to choose between a 401(k) and an HSA. The reality is that it is not an either/or proposition. Working together HSAs and 401(k)s can create a stronger financial foundation for the future. HSAs complement retirement savings options like 401(k)s by helping employees plan and save for the health care costs they inevitably will encounter over their lifetimes, both now and in the future.