How Can HSAs Be Framed As Retirement Savings Vehicles?

A survey from Further, a national health savings administrator, found 65% of consumers report leveraging their health savings account (HSA) as a spending resource, with 23% stating they use their account equally for saving and spending. Yet more than two-thirds of employers said they associate HSAs with savings only, suggesting a gap in how employers are positioning these accounts compared with how employees are using them.

David Speier, managing director of benefits accounts at Willis Towers Watson in Washington, D.C., said, “[HSAs] are tied to plans with higher deductibles; employees have spending needs and they are already saving in retirement accounts. We see in all our data that pure savers are a small fraction of overall account holders. When more are living paycheck to paycheck, there will be more spenders, not savers.”

A study conducted by the Employee Benefit Research Institute (EBRI) found more than half (56%) of 401(k) participants reduced their retirement plan contributions in the first year that they made HSA contributions. The study noted there is a limit to how much some participants can save for various goals.

PLANSPONSOR recently conducted a survey of employers and found that among those who offer HSAs, none position them exclusively as a strategy to save for health care expenses in retirement. Nearly half (48%) position them as mainly a short-term savings tool that doubles as a retirement savings strategy, and one-third (32%) reported that they market their HSAs to employees as equal parts retirement savings strategy and a short-term health savings tool.

Kim Buckey, vice president of client services at DirectPath LLC, headquartered in Burlington, Massachusetts, says most consumers are still using HSAs to cover immediate health care expenses. However, she notes that those who are fortunate enough to have an HSA may have seen their account assets accumulate because many people were foregoing medical care during the pandemic. Buckey says this is something employers can leverage as they communicate about HSAs.

“If employees can avoid using the funds for immediate purposes, they can see from the experience during the pandemic how it can add up and be helpful for longer-term expenses,” she says. Buckey adds that longer-term savings doesn’t have to mean saving for retirement—it could also mean planning for having a baby in the future, for example.

The effects of COVID-19 on employees’ finances have caused many to question whether they need to rethink their timing for retirement, and Buckey notes that some have been forced into retirement.

“It’s important for employers to educate employees about the medical costs in retirement,” she says. “Most employees don’t understand that Medicare doesn’t cover everything. And, according to Fidelity’s estimates, the average couple retiring at age 65 in 2020 would need $295,000, after taxes, to pay for health care in retirement. This is in addition to living expenses.”

Plan sponsors should emphasize employees’ need to supplement savings, Buckey suggests.

“This is a great opportunity to introduce a transparency program so employees can find medical care for a lower cost,” she says. “This will reduce the amount they will need to take out of their HSAs for current expenses, so that savings will accumulate for future use.”

DirectPath’s own studies show HSAs are increasingly popular offerings from employers. Its 2020 Medical Trends and Observations Report shows 69% of employers offer HSAs versus just 12% offering health reimbursement accounts (HRAs). But, Buckey concedes, many employees will struggle to find the extra money to contribute.

“The most successful HSAs do involve employer contributions,” she says. “If employers contribute seed money to HSAs or offer HSA contributions as an incentive for participating in a wellness program, it will encourage employees to consider HSAs as a savings option.”

Buckey recommends plan sponsors “sell” HSAs just as they do their retirement plans. “Talk about the tax advantages, show how even a small contribution can grow over time, discuss the investment options that are available—even auto-enrolling participants into HSAs will help, as it is one less decision for participants,” she says.