A couple of weeks ago, I posted on the vast gap between the savings we'll actually need for health-care in retirement and the amount most people think they'll need. Here's a bit of good news on health savings accounts, an under-utilized way to accumulate those funds for people enrolled in high-deductible health-care plans. –Lenny Bernstein
There is quite a bit of research that highlights the danger of financial shortfalls in retirement faced by many Americans. Although some people accrue enough savings to meet their basic needs, health costs – which tend to rise after retirement – remain a major concern. A recent MarketWatch analysis found that most retirees will spend an average of $250,000 on out-of-pocket health costs during their retirement years, an amount that can quickly cut into their savings.
Health savings accounts (HSAs) offer consumers a way to save for these costs now and into retirement years. But many consumers view them only as spending accounts for managing in-year expenses. Employers and HSA providers who help workers understand the full potential of HSAs will give them a valuable option and will benefit themselves..
Health savings accounts were introduced just over 10 years ago, many years after flexible spending accounts (FSAs), which you use to pay medical bills each year. Many consumers confuse their features. FSAs were designed as a way to manage predictable health-care expenses within a given year. HSAs are designed to be a powerful short and long term savings vehicle.
HSAs are individual accounts, owned by the consumer, just like personal checking and savings accounts. As such, they are portable – the account and the contributions in it remain the property of the account holder, even if he or she changes jobs or enrolls in a different health insurance plan. Consumers can continue to contribute up to the allowable IRS limit, as long as they are enrolled in qualifying high deductible health plans. The funds roll over from year to year with no expiration.
Best of all, HSA contributions are triple-tax-advantaged. Contributions are tax free. Once HSA account balances reach a minimum threshold, funds can be invested, with interest and earnings on investments tax free. And HSA account holders do not pay income tax on funds when they withdraw the money for qualified health-care expenses, as they do with the money in their 401Ks.
All of these features make HSAs an attractive way of managing near term health-care spending and saving for health-care costs through retirement.
Employers also benefit when their employees understand the full value of HSAs. Employers realize an immediate tax benefit when more workers adopt HSAs and contribute to them. HSAs augment benefit programs, which are typically designed with the intent of attracting and retaining talent. Forward-thinking employers may want to offer integrated retirement planning strategies that take into account potential future health needs by offering to match contributions to HSAs, as they do for 401Ks.
HSAs are growing as more people come to understand them. According to a recent report, assets in HSAs exceeded $20 billion as of January 2014. Growth is stable. And HSA investment assets have now reached $2.3 billion, meaning that more than 10 percent of HSA deposits are currently invested in mutual funds or other long-term growth vehicles. These trends are expected to continue as the popularity of HSAs grows and consumers increasingly look to HSAs as a complement to their retirement savings.
Tom Torre is chief executive of Alegeus Technologies, which provides benefit and payment solutions for employers.