Future Planning

The Triple-Tax Savings of Health Savings Accounts

Key strategy to prepare for future health costs

HealthView Services Issues report highlighting the importance of saving for health care costs in retirement. Access report here.

DANVERS, MA, May 26, 2020 – HealthView Services today issued a new report highlighting the importance of saving specifically for health care costs in retirement. The company, which provides health care cost projection software, urges consumers to rethink and maximize the unique triple-tax savings of Health Savings Accounts (HSAs).

Data from HealthView Services show that an average American couple entering retirement in good health can expect approximately $600,000 in future lifetime health care costs. Yet many do not factor health expenses into their retirement financial planning.

“Americans need to take better advantage of one of the best ways to stretch their retirement savings: the HSA,” said Ron Mastrogiovanni, CEO of HealthView Services. “HSAs have a triple tax benefit – money goes in pre-tax, grows tax-free, and can be withdrawn for health expenses tax-free. As such they are uniquely advantageous and an extremely effective ways to stretch retirement savings.”

A Retirement Financial Planning Tool

In its report, HealthView Services shows that although an HSA is exclusively available to those who participate in a high deductible health plan (HDHP), it should be viewed through the same lens as a retirement financial planning tool like a 401(k) or 403(b) and used only modestly for current year health expenses.

“Employees who can afford to fund the potentially higher out-of-pocket health expenses of an HDHP through their household budget, should set aside as much money as possible under the pretax HSA funding cap: $3,550 in 2020 for individuals and $7,100 for couples.

As our report shows, even modest HSA savings today can grow and offset substantial future health costs,” Mastrogiovanni said. “We urge any organization concerned with helping people save for retirement to discuss the HSA in this light.”

Excerpts From The Report: The Long Term Value of an HSA

A Third Of Americans Have Access To An HSA

HSAs are paired, under law, with high-deductible health plans (HDHPs). They are not available with other plan designs such as indemnity, PPO or HMO plans. Approximately 30% of Americans are currently enrolled in HDHPs, and that number has grown significantly over the last several years. In the 10 years through 2017, enrollment in high-deductible health plans with an HSA grew from 4.2% to 18.9%—a 350% increase—among adults aged 18–64. That growth is unsurprising, given that many large firms have promoted high deductible plans due to their lower premiums and their overall dampening effect on healthcare spending.

The National Bureau of Economic Research (NBER) found that employers that offered high deductible plans over a three year span were successful in reducing company healthcare expenditures. These savings are possible for employers because HDHPs are designed to bring out the consumer in the patient. They do this by making the employee’s wallet a larger part of paying for healthcare and thus arousing the consumer instinct to seek lower cost, high value healthcare.

Data from HealthView Services show that an average American couple entering retirement in good health can expect approximately $600,000 in future lifetime health care costs...

With this pressure on health costs, the goal is that competitive market forces will assert themselves and bend the cost curve. However, not every patient is a consumer – those with acute or chronic care needs generally require expensive care. And many employees struggle to afford the deductibles and cost sharing in these plans, which can lead to unhealthy behaviors. No effort should be inferred from this paper that rationing necessary care today to afford savings for tomorrow is suggested. All people in an HDHP must prioritize their health today, or the remainder of this discussion is a moot point.

Rethinking The HSA

For people who can reasonably afford their plan’s annual deductibles, which average about $2,500 for an individual and $4,700 for a family as well as other cost sharing in the plan (which may be several thousand) the HDHP is a solid benefit solution that encourages healthy behaviors. And it comes with a lifelong, portable silver lining: the HSA. Used properly, the HSA may be able to fund a significant portion of projected health costs in retirement.

Americans need to rethink and reframe the HSA. Healthcare coverage is an annual benefit tied to the employer. An HSA is a life-time product tied to the individual. It does not need to be used in the health benefit plan year, and it should not be, if possible.

Even though the HSA comes with the health benefit plan, it actually should be viewed through the same lens as a retirement planning tool like a 401(k) or 403(b). HSAs are, due to the virtually tax-free status they uniquely claim, one of the best ways to stretch retirement savings.

HSAs have a triple tax benefit. First, the money goes into the account pre-tax. (And a portion of the contribution may come from the employer.) Second, once the HSA balance reaches $1,000, it can be invested, and growth is tax-free. Third, in retirement (or before if necessary) money used for health expenses comes out tax-free.

In The Benefits Alphabet Soup, Making The Case For An HSA

Arguably, the HSA is poorly understood by many employees, and more should be done to educate people on how they work, and how they should be used. That education can be provided in a number of different ways – directly by employers, by HSA record keepers or retirement plan providers, by financial advisors, accountants, banks or life insurers, especially if participants have access to personalized healthcare cost and funding projection software.

Consider that:

  • One of the country’s largest retirement services providers conducted a study of plan participants and the results are telling. Those who were shown individualized projected costs of their healthcare in retirement increased deferrals by 25%.
  • Data demonstrates that modest, consistent HSA contributions may fund a significant portion of workers’ eventual retirement healthcare costs (see case below).
  • People like and use online calculators. Many employers offer calculators that enable individuals to estimate healthcare costs for the next benefit year. Many 401(k) plan administrators offer calculators that help individuals project their retirement savings. Data is available to fuel calculators that project future healthcare costs.

 

 

 

About HealthView Services
Founded in 2008, HealthView Services is the nation’s leading provider of health care cost projection software. Its portfolio of retirement health care planning applications is used by advisors, financial institutions, employers and consumers to create comprehensive, reliable health cost projections for 33 million users annually. Visit us to know more: www.hvsfinancial.com.