As health savings account account balances grow and become sizable assets for employees, they become a powerful - and increasingly necessary - financial planning tool.
For example, a 65-year-old married couple who retired in 2011 with median prescription drug expenses would need $287,000 to have a 90% chance of covering all medical costs after retirement, according to an Employee Benefit Research Institute study.
Retirement expert Kimberly Sexton believes an employee can fund that number by saving via a health savings account.
By saving $5,000 a year in an HSA at a modest 5% rate of return for 25 years before retiring, an employee will have more than the recommended $250,000 to cover retirement medical expenses.
"Health savings account contributions go in tax-free, grow tax-free and come out tax-free," Sexton explained to benefits managers at EBN's 2012 Benefits Forum & Expo.
Sexton, vice president with Total Benefit Communications, LLC, presented the advantages of contributing to an HSA, as compared to investing in a typical 401(k) plan:
- Freedom to rollover funds. Unlike 401(k)s, which have strict rollover limitations (only in cases of disability, change in employment or death), HSAs allow participants to roll over funds at any time. Employees can move their money to a bank or credit union HSA that earns interest to grow tax-free, if their employer plan doesn't offer one.
- Flexibility with investments. There are also very few restrictions on investments within an HSA. Participants can invest their funds in real estate, private notes and mortgages, limited partnerships, stocks and mutual funds. Conversely, employee participants in a 401(k) only have access to investments their employer offers within the plan.
- Non-health expenses. HSAs also can provide a stream of income in retirement to be used for non-qualified medical expenses. Potentially, some of this income can also be withdrawn on a tax-free basis.
- Death benefits. When HSA participants die, the remaining funds go to their designated beneficiary. If the beneficiary is a spouse, the spouse can continue to use the tax-free benefits. If the funds go to another beneficiary, they become taxable.
Maximizing Account Advantages
Sexton recommended that employees contribute the maximum level each year to their HSA. For calendar year 2013, the maximum contribution level is $3,250 for an individual and $6,450 for a family, with an additional $1,000 catch-up contribution for participants 55 years or older.
Employers can contribute to workers' accounts through payroll in a lump sum at the beginning of the year, or divide contributions throughout the year. According to Sexton, employees prefer a lump sum in January or a quarterly contribution so they can better plan for their medical expenditures during the year.
Sexton advised benefits managers to explain the tax-free benefits of building an HSA and strategies employees can use "to maximize usage of this account."
Employers that offer a high-deductible health plan with HSA should encourage workers to set up an account, "even it's just [contributing] a nominal amount," she added. It's important "to start that clock ticking."
HSA contributions can be spent on a variety of medical items, such as bandages, insulin, contact lens solution, long-term care insurance premiums, unreimbursed medical expenses, and even driving mileage to medical appointments. The expenses must be incurred after the individual set up their HSA account.
By contributing to an HSA account and growing their investments over time, employees can cover medical expenses in retirement without tapping into their 401(k) or IRA funds - providing another robust financial planning tool that can help workers live comfortably in retirement, Sexton noted.
A separate session at BFE, led by Jennifer Benz, founder of Benz Communications, and Dennis Triplett, CEO of UMB Healthcare Services, outlined ways employer can maximize enrollment in HSAs.
Attractive plan design and effective communication are key to successful HSAs. "We see a lot of companies hanging on to these really confusing or counterintuitive plan names," Benz said. "If you call the health plan the HDHP or the Catastrophe Plan or the high-deductible plan, you have to know that's not super, super appealing."
Triplett emphasized letting the plans speak for themselves. Employers should make sure their HSA actually has features like tax breaks and catch-up contributions for older workers and then just present them accurately and engagingly.
Benz agreed, saying that "robust, ongoing education" was far superior to trying to cram everything in during the open enrollment period.