Tackling HSAs During Open Enrollment

With open enrollment season starting soon for many plan sponsors, participants are considering their health benefits and may have questions about health savings accounts and high-deductible health plans. 

One-third of respondents to Fidelity’s “Fall 2023 Health Care Outlook” said they look to their employer or benefits provider when making enrollment decisions, and nearly half look to their health care providers. Fidelity stated in its report that “all players in the health benefits ecosystem need to be aligned in delivering education and resources during annual enrollment and beyond.” 

The good news is most Americans do not procrastinate about health decisions, as Fidelity found that 59% make their benefits selections within the first two weeks of annual enrollment. In addition, when it comes to workplace benefits as a whole, health care was the top priority for 47% of men and 54% of women. 

Each generation has different health care concerns. Generation X participants were most concerned with their physical health, whereas one in five Baby Boomers said affording health care was their top concern. Gen Z participants and Millennials skewed toward more concern about unexpected health care costs, as well as their mental health.  

Clearing Up Misconceptions 

Fidelity estimated that a 65-year-old individual retiring in 2023 will spend $157,500 on health care in retirement, but 95% of Americans believe they will have to spend less than Fidelity’s estimate.  

For individuals with a high-deductible health plan, an HSA could serve as a useful tool to pay for qualified medical expenses, as well as to plan for health care costs in retirement. However, according to Fidelity, half of Americans are unfamiliar with HSAs and their triple-tax advantage: no taxes on contributions, no taxes while money grows in the account and no taxes on withdrawals. 

Despite these advantages, only about half (49%) of survey respondents were familiar with the features of HSAs, and 46% incorrectly believed that HSAs expire at the end of each year. Even more respondents (51%) were unaware that HSA dollars could be invested. 

Unlike a flexible savings account in which unused contributions are lost at the end of the year, HSA funds can be rolled over to the next year.  

Communicating With Older Participants 

WTW recently published several tips for employers on communicating to pre-retirees the benefits of HSAs. 

As participants are nearing their retirement age, WTW recommended that employers encourage participants to make catch-up contributions to an HSA. Because medical costs tend to increase significantly with age, catch-up contributions can help employees set themselves up for these costs in retirement. 

In addition to contributing up to the 2024 IRS maximums of $4,150 for a single person and $8,300 for families, employees aged 55 or older can make an additional $1,000 catch-up contribution. 

WTW also advised that plan sponsors tell older employees to stop contributing to their HSAs before they are enrolled in Medicare, because Medicare enrollees are not eligible to contribute to an HSA, and there are tax and financial penalties if they do. As a result, the Centers for Medicare and Medicaid Services and the IRS suggest employees stop contributing to their HSAs before they turn 65 or, if they are delaying Medicare enrollment until after age 65, more than six months before they enroll Medicare.  

Lastly, WTW said it is important to remind employees what happens to their HSA balance once they stop contributing. The money in an HSA belongs to the accountholder, and once people reach age 65, HSA money can be withdrawn for non-health care expenses with no penalty, but those expenses will be subject to income tax. 

As retirees will inevitably face uncertainties of inflation, market fluctuations and rising costs for senior-living facilities and elder care, employers have an opportunity to address these needs during open enrollment by providing more education about HSAs and health benefits as a whole.