Feasibility of HSAs as Retirement Savings Strategy

Research from the Employee Benefit Research Institute (EBRI) shows an individual who saves in an HSA for 10 years could accumulate between $53,000 and $68,000, depending on the rate of return realized and on the contribution rates assumed, while those saving for 20 years could wind up with between $118,000 and $193,000.

But, EBRI concedes that in order to maximize the savings in an HSA to cover health care expenses in retirement, HSA owners would need to pay the medical expenses they incur prior to retirement on an after-tax basis using money not contributed to their HSAs, and many individuals may not have the means to both save in an HSA and pay their out-of-pocket health care expenses.

To offer employees HSAs, employers must pair them with high-deductible health plans (HDHPs). Bob Kaiser, head of Health Benefit Solutions for Bank of America Merrill Lynch in Charlotte, North Carolina, says there is value in this arrangement for employees and advantages for employers.

According to Kaiser, year-after-year, Bank of America Merrill Lynch’s CFO Outlooks show health benefit costs are a big concern for employers. HDHPs cut costs for employers, as employees pay a higher share of health care expenses through higher deductibles and higher co-insurance. Also, employers want employees to focus more on healthy behaviors and prevention of illness and disease; studies show HDHPs make employees more cost-conscious, and enrollees are more likely to take part in wellness programs. He says some employers are willing to contribute to employees’ HSA accounts to encourage participation in wellness initiatives.

Employees need to think about health care costs in retirement, Kaiser says. An EBRI study shows a couple that retires at age 65 can expect health care costs of more than $280,000. If an employee uses his 401(k) or 403(b) retirement plan savings for health care expenses, it will diminish savings that can be used for other living expenses or leisure, he notes. With an HSA paired with an HDHP, employees can put aside money each year for health care, they do not have to take required minimum distributions (RMDs) from those accounts, and the savings can continue to be invested and grow. In addition, when contributions and earnings are taken out to be used for medical expenses, they are not taxed.

Kaiser suggests that an HDHP should instead be called a low-premium health plan. “It is no different than what they would expect with house or car insurance—the higher the deductible, the lower the premium,” he says. Theoretically, the lower premium allows employees to take the difference in what they would pay in premiums and put that into the HSA.

To use HSAs to save for health care in retirement, ideally, an adviser may suggest, the employee should contribute enough to his retirement plan to maximize the employer match contribution then shift to putting the maximum allowed contribution into an HSA, according to Kaiser. He concedes that this is a good plan for the young and healthy, but there will be some who will spend their savings on current health care expenses.

Bill Heestand, president of The Heestand Company in Portland, Oregon, agrees that if the employee is young and healthy, he can accumulate savings in an HSA, but most employees are older or use regular medications, and those with families are going to the doctor more often than others, so the ability to have enough free cash flow to allow HSA savings to accumulate for retirement is hard to achieve.

Heestand also says most employers view health insurance as a competitive benefit, and they need to offer something that is much more supportive to employees. His firm recommends that if an employer wants to offer HDHPs with HSAs, they should fund the contributions 80% to 100%. Kaiser points out that EBRI found 71% of workers with HSAs say employers contribute to their accounts.

However, Heestand contends that even if employers fund almost 100% of participant HSA contributions, the accounts will likely be used by employees on an ongoing basis, and not used as savings for health care expenses in retirement. He suggests a legislative change to HSA rules would make them more viable as savings vehicles for retirement.

He notes that current HSA legislation prohibits the use of co-pays for doctor visits and prescription medications at all. Assuming it is reasonable a family could have a doctor visit for some member every other month, if Congress allowed for a co-pay for six doctor visits and 12 prescriptions, for example, the family would need to use less HSA savings. This could help a larger percentage of people accumulate HSA savings, Heestand says.

“Plan sponsors that are in an influential position should point that out. It would be a helpful conversation to get started,” he suggests.

Educating employees is important to their use of HSAs, Kaiser says. Presenting HSAs side-by-side with retirement plans as two factors in employees’ retirement savings strategy is helpful. But, even those employees who spend their HSAs on current medical expenses are saving money because they are using pre-tax funds.

A consultant can provide a holistic view of an employer’s health benefits offering to help them determine if they want to continue with current benefits or add an HDHP paired with HSAs, he suggests.