- Health savings accounts (HSAs) offer significant tax benefits. But a lack of education and awareness means they're underutilized.
- HSAs can be a valuable retirement savings tool. Transition to viewing HSAs as a long-term investment vehicle rather than a day-to-day checking account.
- Businesses have a role to play. The key to shifting the conversation on HSAs is greater employer communication and education.
Two decades into the introduction of health savings accounts (HSAs) as a health insurance option — typically offered in conjunction with a high-deductible health plan (HDHP) — many employees continue to dismiss the benefit in favor of a traditional health insurance plan.
Doing so may mean missing out on a valuable long-term retirement savings tool with triple tax benefits.
“We've not done a good job as an industry on educating employees on the benefit or value of a high-deductible health plan paired with an HSA,” said Jared Benson, retirement plan advisor at NFP.
Utilizing HSAs as a Retirement Savings Vehicle
HSAs are the most tax-efficient vehicle for retirement savings, with pre-tax contributions, tax-free investment growth, and no taxes on withdrawals if they are used for qualified medical expenses.
Although high-deductible health plans can mean increased medical costs in certain cases, several aspects of utilizing an HSA can balance out those increased costs, or even offer savings:
- Lower monthly premiums
- Tax savings, sometimes up to 20% or 30% depending on tax bracket and state, when pre-tax contributions are made to the account
- Additional tax savings by using funds from the account to pay for medical expenses
“I still oftentimes hear benefit brokers or HR professionals, when communicating these benefits to employees, say, 'If you're healthy, go with an HSA plan, and if you're sick and utilize insurance a lot, go with a traditional plan,'” Benson said. “The way most benefit packages are designed, that couldn't be further from the truth.”
Some employees put only enough in the account for their annual medical expenses — or they keep their contributions in a transaction account paying little to no interest rather than investing them.
Ideally, HSA contributions should outweigh what an employee spends each year on medical costs, to carry over funds each year and take advantage of the compounding effects of the account.
Start small if needed by contributing the per-paycheck premium savings from utilizing a high-deductible health plan as opposed to a traditional plan. Contribute payroll deductions as much as possible to maximize tax benefits.
Although it's best to consult with a tax advisor, a general guideline for utilizing employer-sponsored retirement savings vehicles is this:
First, contribute the amount needed in a 401(k) to receive the maximum employer match if one is offered. Then, contribute to an HSA (the maximum allowable contribution for 2024 is $4,150 for an individual and $8,300 for a family). If you max out your HSA contributions and have room in your budget for additional retirement savings, increase your 401(k) contributions at that point.
“Your health care is not going to get more affordable the older you get,” said Sander Domaszewicz, senior principal with MercerWell, who leads health care consumerism for Mercer. “This is a way to set aside money for the future in a tax-advantaged way. It's not a replacement for a retiree medical plan, but it's the best thing going if you don't have a retiree medical plan.”
Best Practices for Employers
With 80% of large companies offering HSA-eligible plans, including this option in your benefits is a competitive advantage for businesses, Domaszewicz said. Best practices include:
- Contribute to employees' HSAs. Some businesses contribute if employees complete certain wellness activities. Some match dollar for dollar up to a certain amount, incentivizing employee participation, while others double employees' contributions up to a certain amount if they make less than a set salary. “They're acknowledging that it's harder for folks to contribute their own money depending on their pay,” Domaszewicz said.
- Communicate the availability of the HSA benefit and ways to effectively utilize it. Offer calculation tools and examples of what utilization looks like in different health and family circumstances.
- Periodically remind employees about the benefit — including by letting them know they can start or increase contributions at any point during the year. “Drip messaging works,” Domaszewicz said. “It may not be the right time this time, but three months later, it might be.”
- When possible, mirror the investment offerings in a 401(k) and HSA. “Then an individual can understand, 'I'm not contributing less, I'm just moving to a different vehicle where the investment options are the same,'” Benson said.
Increasing employees' utilization of HSA-eligible plans may keep annual renewal costs lower for employers, as workers with this type of plan are more likely to research and use more cost-effective health services.
"The decisions employees have to make during open enrollment can have a dramatic impact not only on their immediate financial health but their retirement outcomes as well,” Benson said. “Empowering employees with the tools and resources they need to make the right decisions on their benefits will lead to meaningful improvement to their financial futures and increased satisfaction with their benefit plan.”
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