Tying HSAs to Retirement Savings

A key problem with promoting health savings accounts (HSAs) as a retirement spending vehicle is that they are tied to medical benefits, and so that’s how participants think about them, Kelley Long, certified financial planner with Financial Finesse, told attendees of a webinar hosted by the Plan Sponsor Council of America (PSCA). She shared information to help employers promote HSAs as a retirement savings tool for employees.

She first pointed out some similarities and differences between Employee Retirement Income Security Act (ERISA) defined contribution (DC) plans and HSAs. For example, both can deliver benefits for the lifetime of the employee and his or her spouse. Both are funded and trusteed.

There are some penalty-free payouts. For HSAs, funds can be paid out at age 65 as income not going to health care expenses; such distributions are taxable, but there is no penalty, Long said. Employees at age 65 could cash out their HSAs if they think they won’t need them for retirement health care expenses.

Both offer catch-up contributions. For HSAs, at age 55, the HSA owner can make catch up contributions annually of up to $1,000. Also both ERISA DC plans and HSAs are portable. For HSAs, however, funds may be moved at any time—not only upon a distributable event. Long shared that she has done this when she found an HSA provider other than what her employer used that had certain investments she wanted to use.

Long also pointed out the triple tax advantage of HSAs—contributions reduce taxable income; earnings on the accounts build up tax-free; and distributions from the accounts, for qualified expenses, are not subject to taxation. Long added that if funds are taken out of HSAs prior to age 65 to cover expenses other than qualified medical expenses, there is a 20% penalty on the withdrawal, but after age 65, there is no penalty.

Long said she considers it a negative that HSAs are tied to HSA-qualifying health plans (i.e., high deductible plans), but pointed out that industry groups are asking Congress to consider changing this. She also added that once a participant is enrolled in Medicare, he can no longer make contributions to an HSA, even if still enrolled in a qualifying medical plan of his employer. However, HSA funds may be used to pay certain Medicare premiums and long-term care insurance premiums, and participants can reimburse themselves if they have saved receipts for expense incurred prior to enrolling in Medicare.

Promoting enrollment in HSAs

Long said employers need to think through how to communicate about HSAs to promote better enrollment. For example, she recommended not calling the medical plan to which HSAs are attached a “high-deductible health plan,” but rather “the HSA plan” or “HSA-qualifying plan.”

She also recommended that employers not make their contributions to HSAs a percentage of premiums, but a flat dollar amount or an incentive-based contribution based on participation in wellness program initiatives. Long added that retaining drug co-pays in other plan types can keep employees from enrolling in the HSA plan because employees want more company payment for drugs. She also recommended employers align what expenses are subject to the deductible for other medical plan offerings and the HSA plan.

Some employers allow employees to change contributions during the year, and just like with individual retirement accounts (IRAs), they may also make lump sum contributions to HSAs prior to April 15. These will be considered prior year contributions.

Long pointed out that findings from the field of behavioral economics have led to automatic solutions for DC plans, and employers should use that same thinking with HSAs; if an employee selects the HSA-eligible medical plan, employers can automatically set them up with an HSA.

She also discussed two potential options for employers:

• Use what she called a passive campaign, which includes a mid-year automatic enrollment for employees eligible for an HSA that are not maximizing contributions, and includes automatic contribution escalation up to the maximum contribution allowed.
• A 2018 PSCA Signature Award winner reached out to all employers contributing more than the match to its DC plan to encourage them to put the excess into their HSAs.

Communicating to employees about HSAs

When communicating to employees about HSAs, employers may address some common participant mistakes. For example, a participant may open an HSA but not fund it, and if they have an eligible expense, they cannot go back and put funds into it to cover that expense. However, if employees put in just $1 when they open the HSA, they can go back and put more funds in to cover an expense.

Most employees only contribute to their HSAs what they expect their annual expenses to be, and some use HSA funds for routine costs, such as vitamins or Band-Aids, but these actions will limit the ability for employees to build up funds in their HSAs for retirement medical expenses.

Many HSA providers allow employees to invest their funds once their HSA account reaches a certain amount. Employers should encourage employees to invest their funds and also to monitor and adjust their investments so they are not too risky as the employee nears retirement age, Long suggested.

Employees should also be encouraged to roll over HSA balances when they leave an employer and not take a distribution and spend the money, she added.

Long said employers may consider communicating this way to combine HSA and DC plan savings: Put $1 into the HSA right away for eligibility, save up to the DC plan match, contribute additional savings to the HSA up to the maximum allowed if they can, then if they want to save more, go back to adding savings to the DC plan.

Employees should be encouraged to invest HSA funds for future expenses—only using them for major medical expenses when other funds are not available. According to Long, ideally employees will keep enough in their HSAs to fund the current year medical plan deductible or out-of-pocket expenses and invest the rest. However, employees shouldn’t rack up debt (for example, by paying out-of-pocket for acupuncture) if they have funds available in their HSAs.

Offering HSAs to employees will make them less likely to take hardship withdrawals or loans for medical expenses, and alleviates the demand for retiree medical benefits, according to Long.