Increasingly, employers are shifting more of the cost of their healthcare to employees. One tool that has emerged are high-deductible health insurance plans and their associated HSA accounts. HSAs allow employees to contribute money on a pre-tax basis into an account that can be used to cover qualified health care expenses not covered by insurance with tax-free withdrawals.
Many are touting the HSA as the fourth leg of the retirement funding stool that includes Social Security, pensions and retirement savings via 401(k) plans, IRAs and other vehicles. (For more, see: Tips on Delaying Social Security Benefits.)
According to a study by the Employee Benefit Research Institute (EBRI) about 15% of HSA accounts are funded to the maximum levels allowed (currently $3,350 annually for individuals and $6,650 for families). This compares favorably to the level of about 12% of the 401(k) accounts surveyed that receive the maximum salary deferrals from employees.
The HSA Planning Opportunity
Paying directly (versus tapping the HSA account) for out of pocket medical expenses while working allows these HSA funds to accumulate funds to cover the cost of healthcare in retirement which has been cited as a major expense hurdle to achieving a financially successful retirement. (For more, see: Planning for Healthcare Costs in Retirement.)
Part of the issue of underutilization is likely that many employees are unaware of the types of medical and related expenses that HSA money can be used for. These funds could be used to pay premiums for Medicare supplements, long-term care insurance or other health insurance options. Additionally, medical expenses for items such as dental, vision, hearing aids and batteries as well as expenses for therapy can be covered via tax-free withdrawals from these accounts. (For more, see: Helping Clients Choose Long-Term Care Insurance.)
The other nice feature is that unlike Flexible Spending Accounts (FSA) the HSA is does not have a "use-it-or-lose-it" feature. With the FSA the benefit generally cannot be carried over to the next year, any dollars contributed to the plan that go unused are generally lost. (For more, see: Comparing Health Savings and Flexible Spending Accounts.)
What’s Preventing Higher Contributions?
In some cases the employee’s cash flow is an impediment to contributing to or increasing their contributions to an HSA. We are all told that we need to save as much as we can for retirement and that ensuring that we contribute enough to our 401(k) to receive the full employer match (if one is offered) need to be priorities. At some point many employees are strapped for cash and just don’t have the extra money to bump up their HSA contributions. (For more, see: 3 Reasons to Use an Employer-Sponsored Retirement Plan.)
Another factor could be a lack of awareness of how HSAs work and their potential use as a retirement savings vehicle.
Increasing Educational Awareness
It behooves employers to educate their employees about the uses and merits of HSA accounts in general and their use as a retirement savings vehicle.
The trend is to shift more of the burden of paying for health insurance and medical costs onto the employees. HSAs and high-deductible health insurance plans are tools. Higher out-of-pocket costs help keep premiums more reasonable for employees and the HSA can be used as an additional retirement savings vehicle or to cover out of pocket costs such as the annual deductible. (For more, see: Should Employers and Employees Be Forced to Make Contributions?)
In an era where retiree medical plans via employers are disappearing from the landscape the use of HSA accounts to help employees save for retirement health care costs should be encouraged.
The EBRI study also showed that employer contributions did not correlate to higher employee contributions. Nonetheless, I think that most employees would consider this to be a positive employee benefit as this is essentially free money. These contributions, of course, are not tax deductible for the employee.
Financial advisers should be incorporating the use of HSA accounts for their clients who have access to them, are able to fund them and for whom the additional tax deductions and retirement savings would make sense.
Many HSA accounts both via employer sponsored plans and private plans offer investment options beyond just a money market or interest bearing account. Especially if the client won’t be tapping this money for a number of years this is another opportunity for a financial adviser to provide investment advice to their clients. (For related reading, see: Fee-Only Financial Advisers: What You Need to Know.)
For clients who are able to cover annual out of pocket medical expenses from their own resources and who can let the HSA grow over time, investing this money into investment options beyond money market funds that will allow growth until needed down the road. (For more, see: How an Advisor Can Help Cut Your Healthcare Costs.)
These clients will are able to reduce their taxable income via the contributions and as mentioned they are able to accumulate money to spend on healthcare related expenses down the road.
The Bottom Line
High deductible health insurance accounts, along with the eligibility to contribute to an HSA, are becoming increasingly available to employees as their employers seek to reign in their healthcare costs and shift more of the responsibility to employees. HSAs represent a fourth leg on the retirement planning stool along with Social Security, pensions and other retirement savings for employees who can afford to contribute and who understand the potential that HSAs represent as a means to help them cover healthcare expenses in retirement. It behooves employers to make sure that their employees fully understand the potential and the benefits of using HSAs to accumulate money to cover future medical expenses. These accounts, both connected with a client’s employer and for plans outside of the workplace, represent an excellent financial planning tool for financial advisers to help their clients save and plan for retirement. (For more, see: Five Tax Law Changes in 2015 You Need to Know.)