How HSAs can offer long-term investment savings opportunities
by Kevin RobertsonMr. Robertson is Chief Revenue Officer at HSA Bank. Visit www.hsabank.com.
It’s hard to believe it’s been more than two years since a national emergency was declared on March 13, 2020 in response to the COVID-19 pandemic in the United States. Since then, the impacts of the pandemic and responses to it have been felt by consumers and employers across the board. For employers, the widespread labor shortages combined with historic low unemployment is changing the game to attract and retain talent. For consumers, inflation and increased costs of living has Americans eager for advice on how to save money now and for the future.
Within this lens of ongoing uncertainty, advisors have a twofold opportunity. First, they can help employer clients reevaluate their benefit offerings and increase employee engagement within the benefits they currently offer to attract, and retain, employees. Second, they can help employees and consumer clients understand how to maximize their current benefit savings, especially if they have a health savings account (HSA).
HSAs are designed for double duty – covering healthcare costs in the present and saving for long-term healthcare needs through investment options.
What’s an HSA?
Health savings accounts are personal savings accounts that help consumers save on current healthcare expenses and for those they’ll have in retirement. Unlike other common health accounts, like flexible savings accounts (FSAs), funds in an HSA stay with the individual no matter where they go in their career—if they’re furloughed, change jobs, or retire.
HSAs can be used to cover IRS-qualified medical expenses such as deductibles, coinsurance, prescriptions, vision, dental care, and more for the accountholder, spouse and dependents.
For 2022 the self-only coverage HSA contribution limit is $3,650 and the family coverage limit is $7,300. If an accountholder is 55 or older, they’re also eligible to contribute an extra $1,000. One thing to note – any contributions that exceed the IRS annual limit must be removed by the tax filing deadline or your employee could incur tax penalties and/or IRS fees.
Triple Tax Savings
The key benefit of an HSA is its triple tax savings. HSAs are the only account individuals can put money into, gain interest on, and use to pay for IRS-qualified healthcare expenses, all tax-free. When combined with a high deductible health plan (HDHP), HSAs offer savings and tax advantages that a traditional plan can’t duplicate. Also, the money that’s not used rolls over from year to year, and after age 65, the funds can be used for any purpose without penalty – only income tax is assessed if used for non-health related expenses.
Because HSAs are the only triple-tax advantaged account, they also offer the flexibility to save and invest funds for years to come, an advantage over traditional retirement options, which are subject to income tax when withdrawn.
Repositioning HSAs as a Long-Term Investment Vehicle
One way to rethink benefits offerings is to reposition the health savings account as a retirement savings tool. The 2022 HSA Bank Health & Wealth Index℠ found that Americans are feeling uncertain about their ability to pay for future healthcare cost with 30% indicating they were not sure if they could afford healthcare costs in the near-term or in retirement. This is a real issue for Americans, and according to a recent study by HealthView Services, it’s estimated that a healthy, average couple age 65 who retired in 2021 will spend $662,156 on retirement healthcare expenses.
Encouraging employees to save using their HSA promotes employee health and financial well-being, and helps employers achieve near- and long-term cost savings. Employers should consider bringing the investment opportunity with HSAs to the forefront of the conversation through proactive employee education to spotlight its potential to shape and secure both employer and employee health and financial wellness.
Since it’s commonplace to maximize HSA contributions in the earning years leading up to retirement, advisors should reinforce with clients that an HSA can be a powerful retirement savings tool and aim to maximize contributions during earning years.
By applying the HSA savings strategy for long-term investment instead of only for current spending, accountholders can more strategically utilize the tax benefits of their HSA. For example, if a client has healthcare expenses in the current year, they don’t need to pay for them at that time to benefit. Instead, they can invest the money in their HSA, using other funds to pay for out-of-pocket medical costs, and as long as they’ve saved the receipts, they can reimburse themselves for those expenses down the road. There’s no time limit on reimbursement from an HSA, so accountholders can maximize their contributions by allowing them to grow over time.
This is a huge opportunity for most, especially when clients are early in their career and likely have fewer medical expenses than they will later in life. For example, HSA funds used to pay for medical expenses in retirement will be discounted at the tax rate other retirement funds are subject to. So, hypothetically given a 20% income tax rate, a client using $1,000 from their HSA funds to pay for medical expenses in retirement would be equivalent to $1,200 from a 401(k). By advising clients to maintain enough funds in their HSA cash account to cover out-of-pocket expenses and their deductible while investing the rest, you can ensure their money is working for their future and that unexpected medical bills won’t disrupt their retirement plans.
In addition, unlike traditional retirement savings accounts such as IRAs, assets in an HSA are not subject to required minimum distributions (RMDs). This can save accountholders a large chunk of money when considering saving for the future.
How HSA Engagement can Drive Attraction and Retention for Employers
A well-designed health benefits plan can aid employers in meeting their objectives by improving a company’s bottom line, as well as attracting and retaining the best talent.
While the labor shifts across the United States currently being dubbed “The Great Resignation” are driven by a diverse range of factors, the 2022 HSA Bank Health & Wealth Index℠ found that healthcare benefits are one of the reasons leading “the Great Resignation” for Generation Z with more than half of Gen Z respondents indicated they would change employers to receive better healthcare benefits. Additionally, according to a recent survey by Pew Research Center, roughly half of those surveyed cited benefits as either a “major” or “minor” reason why they quit a job during 2021. Employers are noticing this.
We’ve seen that when an employer improves employee engagement with their benefits, it ultimately improves the financial wellness not only of that employee, but also of the business itself. This focus on driving outcomes for employees is an encouraging trend. The right plan design with the right benefit accounts and employee communications plan increases employees’ retirement readiness and job satisfaction, along with employers’ tax savings.
Labor Market Is Not Slowing Down
With today’s labor market showing no signs of slowing down, employers should take this opportunity to reconsider the types of benefits that they offer their employees, thinking through an HSA contribution match or incentive program to increase employee engagement, and redefining how the benefits they offer can impact their employees’ savings for retirement.
Advisors should remind employers that in conjunction with an HDHP, HSAs can save employers significantly in the long run. According to Devenir’s 2021 Year-End HSA Research Report, roughly one in five (21%) HSAs were unfunded in 2021, presenting an opportunity to increase engagement and use.
By covering a portion of their employees’ monthly premiums, employers will encourage participation in the health plan and pay less per month in healthcare costs, as contributions to employee health savings accounts qualify as a business expense.
Another way advisors can help employers encourage enrollment in an HDHP with an HSA is through changes to their plan design, such as offering incentives or matching contributions. An HSA incentive structure such as matching or seed contribution encourages an “active” employee role, similar to 401(k) matching programs. This type of structure can significantly increase HSA account balances, save employers and employees money, and improve the perceived value of benefits and retirement readiness.
Advisors can also encourage employers to offer HSAs with automatic or earned money as a further incentive for employees to enroll in HDHPs and contribute their own money to their HSAs.
With some simple shifts and proactive communication with employees, employers can take advantage of this period of heightened consumer interest and engagement in benefits to re-energize their employees and attract new talent.
Savings & Tax Advantages
When combined with an HDHP, HSAs offer savings and tax advantages that a traditional health plan can’t duplicate. The money in an HSA doesn’t expire at the end of the year and stays with the individual no matter where they go in their career, if they’re furloughed, or if they lose their job. HSAs offer clients the flexibility to save and invest funds for years to come – the future healthcare savings opportunities of HSAs are like no other and something to ensure clients are fully maximizing in 2022.
Recent years have highlighted the significant financial benefits HSAs can offer for both emergency healthcare spending and for retirement spending. With more knowledge, advisors can help both employers and employees best utilize HSA plans to maximize health and savings, especially important as we continue to contend with pandemic-related challenges, and ongoing labor shifts.