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Total Benefits | Published in September 2008

Sole Provider?

Health savings accounts (HSAs), touted by their promoters as a way to save for future health-care costs in retirement, will likely end up leaving retirees short of the money they need.

By Judy Ward | September 2008
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Illustration By Brian Staufer

Health savings accounts (HSAs), touted by their promoters as a way to save for future health-care costs in retirement, will likely end up leaving retirees short of the money they need.

That is the conclusion of an Employee Benefit Research Institute (EBRI) paper, "Saving for Health Care Expenses in Retirement: The Use of Health Savings Accounts," published in August. While they may provide some help in retirement, the paper says, "the maximum savings that can be accumulated in an HSA will be far from sufficient to fully cover the savings needed in retirement for insurance premiums and out-of-pocket expenses."

"There is a misinformed belief that they will be more helpful than they really will be in retirement," says the paper's author, Paul Fronstin, Director of EBRI's Health Research and Education program. "You have got the certainty that this is the most money that you can contribute and accumulate, and you have got the uncertainty of how fast health-care costs are going up, what the rate of return will be in retirement, and how long you are going to live."

EBRI points to several drawbacks that HSAs have as an accumulation vehicle for funding retiree health expenses: Only those with a high-deductible health plan can have these accounts; those accountholders face contribution limits; given the coupling with high-deductible plans, HSA holders likely will use a significant amount of the balance for medical expenses during their working years; and distributions cannot be used for employment-based retiree health insurance premiums until age 65.

The paper offers hypothetical examples, including a 55-year-old in 2008 who starts contributing $2,900 annually to his or her HSA. If this person makes catch-up contributions, he or she would accumulate $59,000 after 10 years.

However, according to EBRI estimates, a man age 55 in 2008 will need between $132,000 and $261,000 (depending on prescription drug use in retirement) by the time he reaches age 65 to have a 50% chance of having enough money for premiums and out-of-pocket expenses for Medigap and Medicare Part D.

If an individual preserves only 90% of his or her end-of-year account balance each year, the HSA would have just $38,000 after 10 years—and many or most people likely will preserve a lower percentage.

"That 10% distribution of the account balance each year has a huge impact on savings and, as you get older, you use more health care," Fronstin says. "The benefit of a 401(k) account is that you cannot simply tap into it. With an HSA, there is no penalty for withdrawing money: If you need money for health-care expenses today, you take the money out of the account."

"What they basically say is that, even if somebody maxes out on contributions, he will not have enough money," says Jay Savan, a St. Louis-based Towers Perrin Principal, of the EBRI paper. "We have asked these things to be both a spending account and a savings account. They, by necessity, tend to be a spending account, because they are tied to high-deductible plans but, in order for it to be a savings account, you cannot touch it to pay for expenses."

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