HSA Bill Could Expand Their Use for Retirement Savings

A recent legislative bill and guidance from the Internal Revenue System (IRS) may expand the advantages of health savings accounts (HSAs), averting workers from utilizing dollars on preventive care medicine and instead on health care for retirement.

The Health Savings for Seniors Act, introduced in the U.S. House of Representatives this past month by Representative Ami Bera, D-California, and Representative Jason Smith, R-Missouri, would permit American workers enrolled in Medicare to open and contribute to an HSA, without changing their coverage.

According to HealthEquity, Inc., which participated in drafting the legislation, the bill could save $1,800 for an average household led by someone age 65 or older, with a household income of $48,000. Additionally, the new piece of legislation could save more than $40,000 in income taxes over the course of a Medicare recipient’s retirement.

The introduction of the bill follows recent guidance issued by the IRS, which adds specific preventive care benefits for chronic conditions such as diabetes, asthma, depression and heart and liver disease provided by an HSA-compatible or high deductible health plan (HDHP). Rather than spending at least 25% of their HSA balance on prescription drugs, employees could pocket these dollars for health care retirement savings.

In prior guidance, the IRS did not classify services or benefits intended to treat existing illnesses, injuries or conditions as preventive care. This resulted in diagnosed employees failing to seek or utilize necessary medication and services that would aid a chronic condition, in order to avoid high costs associated with care. This inactive approach would then lead to health consequences requiring more expensive and extensive services, such as heart attacks, strokes, or amputations.

“What this regulation did was take a look at some of these health conditions, because if you don’t take certain medications, you may be adding more symptoms to chronic conditions. Some of these chronic conditions should be using preventative services,” says David Speier, managing director, Benefits Accounts, Willis Towers Watson.

Speier notes how the the regulation could encourage more plan sponsors to offer HSAs, as many were hesitant in the past due to their restrictions. Instead, employers would adopt health reimbursement arrangements (HRAs), which did not hold the same constraints.

“With an HRA, the employee cannot save for retirement,” he adds. “One of the big advantages is, if we can get more employers to adopt HSAs, then most can save for retirement instead.”

Adding to its savings advantages, HSAs are 100% tax-free and can stash dollars without taxation, advantages that may gain traction among plan sponsors and workers given the latest guidance. According to a 2018 Willis Towers Watson survey, 69% of employees chose not to enroll into an HSA because they didn’t see the benefit, understand HSAs or take the time to learn about them. Speier mentions how the IRS guidance and recent bill could shift this attitude towards the savings vehicle.

“Even basic concepts on HSAs aren’t necessarily understood by employees,” he says. “It’s giving them those tools and resources to understand that.”