401(k) & HSA: The perfect retirement power couple?

Approximately 20% of respondents didn’t know that an HSA is portable when losing or leaving a job.Health Savings Accounts are increasingly being positioned as part of a holistic retirement savings approach rather than an account to fund current health care expenses, according to the Plan Sponsor Council of America’s (PSCA) 5th Annual Health Savings Account (HSA) survey, which polled more than 500 employers about trends in design and administration as well as participant usage. More than 40% of employers indicated they present HSAs to employees as a retirement savings tool, up by 27% over two years.

HSA popularity grows

The survey found nearly 90% of eligible employees had an HSA in 2022, and 80% of those reported they contributed to their HSA, up from 72.8% in 2021. The average participant contribution in 2022 was $2,323, a decrease from the past several years, which could be a result of the pandemic and recent economic challenges, according to PSCA.

“Concern for employees being able to fund their HSAs is growing among employers as the economy continues to struggle with higher costs of living, and many are putting supports in place to help,” said Hattie Greenan, director of research and communications at PSCA. “Employers see the benefits of HSAs to help employees cover health care expenses now and in the future and are structuring their programs to help employees do so.”

Borrowing 401(k) strategies

Half of employers said it is a challenge to get employees to open an HSA after enrolling in a qualifying health plan, and they are leveraging successful strategies developed in the retirement savings space to encourage HSA participation, according to the survey, which was sponsored by HSA Bank. Among the strategies employers are using to address this challenge is automatically enrolling eligible employees into HSA plans. Nearly half (46%) of organizations reported they are using HSA auto-enrollment, a 30% increase in just two years.

“One thing we know from the 401(k) is if you automatically opt people in and make them opt out of having a 401(k), and if you set a default perentage for people to contribute to their 401(k), it works,” said Ann Brisk, SVP and director of strategic partnership growth at HSA Bank. “It’s sort of human behavior. If you do it for them, they’ll start doing it and start seeing the benefits and then they are on board with it.”

Employer contributions

Three-quarters of employers make contributions to their HSA plan, and most provide a set amount per coverage level.

“The best way to get your employees engaged and excited about these types of accounts is to help them fund them and put some skin in the game,” said Brisk.

Only 24% of employers who responded to the survey said they fully front load their contribution to HSA accounts, while 41% contribute on a per-pay period basis. While frontloading HSA contributions is the riskiest option for employers, it can be effective in taking away some of the fear around high-deductible health plans for employees, especially in the first year, said Brisk.

Default and suggested contribution rates

Employers also are experimenting with using default and suggested savings rates to encourage participants to more fully fund their accounts. About one in 10 companies said they are using this strategy, according to the study.

“This idea of giving employees a suggestion about how much they should save is, we think, really compelling and something more and more employers could consider as they have their people go through open enrollment and selecting benefits,” said Brisk.

One way employers could calculate a suggested contribution rate is by subtracting the employer contribution amount from the contribution limit and then dividing that by the number of pay periods to give employees a target contribution that would allow them to max out their HSA. Another option would be to suggest an employee contribution based on their salary, such as $25 per paycheck for the lowest income levels, $50 per paycheck for those making more, and so on.

Investment options

More than half (60%) of responding organizations offer investment options for HSA contributions, though most participants choose not to use this option and 70% of all HSA assets remain in cash, the survey found.

“Investments are actually required for HSA programs,” said Brisk. “If you start to think about these accounts from a long-term perspective, being able to invest these dollars is a really great way to grow their HSA deposits.”

Brisk said plan administrators should be making investments easy to find and easy to complete so more people can benefit.

“These accounts become a lot more relevant and a lot more sticky when people start investing and they start thinking about it beyond just this year,” she said, noting HSAs are the only completely tax-free vehicle available for saving.

Recently, employers have been leveraging their 401(k) advisor to create a custom HSA investment lineup for them or one that might mirror their 401(k), said Brisk.

Educating employees

Educating employees about the benefits of HSAs is a top concern among employers, followed by concerns about employees’ ability to fund their HSA. Most organizations provide HSA education for employees during open enrollment, although about one-third of organizations said they provide education throughout the year. Education tends to focus on the tax benefits of HSAs as well as contribution limits.

When building their HSA plan, about 90% of organizations rely on their benefits broker. Their most important concerns are offering an HSA debit card to employees, providing 24/7 customer service, and employee engagement and communication.

Why HSA?

More than three-quarters of baby boomers who are not enrolled in a health plan say costs are the reason. Furthermore, 83% of people over age 65 are worried about current or future medical bills and 37% of those over age 65 say they rarely save for future health care expenses.

Related: 401(k)s are not enough for Gen Z and millennials: Why many are choosing HSAs too

Luis Doffo, managing director, West regional sales at HSA Bank, said it is important for employers to understand why these trends are occurring. He suggests using employee surveys and conversations prior to open enrollment to understand what employees are looking for and how they make their decisions.

“It is important to make sure people are saving for the future because health care costs are going to continue to go up and the need for health care services will always be there,” said Doffo.