Health savings accounts (HSAs) are unlikely to cover healthcare costs in retirement unless contribution limits on the plans are raised and interest rates rise, the nonpartisan Employee Benefit Research Institute (EBRI) said in a new report.

“One of the difficulties in using an HSA to save money for premiums and out-of-pocket expenses during retirement is that contributions to the HSA are limited by law,” said EBRI's Paul Fronstin. “As a result, the savings needed for retiree healthcare far exceed the savings potential of an HSA.”

Fronstin said individuals need to save hundreds of thousands of dollars in their HSAs in order to pay healthcare premiums in retirement, but an illness in their working years or even regular co-pay withdrawals could jeopardize their savings efforts.

HSAs are tax-exempt trusts or custodial accounts that individuals can use to pay healthcare expenses. Because of the way the plans allow employers to avoid some of the huge costs of providing health insurance for their employees, many predict HSAs will replace employer-provided healthcare the same way 401(k) plans have replaced pensions.

Individuals under age 55 can contribute $3,000 a year to their HSAs, and people ages 55 and older can contribute an extra $1,000 a year, EBRI said. The current interest rate is 2%, but will likely rise. EBRI found that an average husband and wife turning 65 in 2010 will need approximately $376,000 in savings to pay for healthcare expenses not covered by Medicare.

"While HSAs can be used to save for healthcare expenses in retirement, the maximum savings that can be accumulated in an HSA will be far from sufficient to fully cover the savings needed in retirement for insurance premiums and out-of-pocket expenses,” Fronstin said.