Encouraging HSA Use As a Retirement Savings Vehicle

Health savings accounts are seen as a valuable tool for covering health care costs in retirement.

Health savings accounts (HSAs) are a viable solution for people looking to cover their health care costs in retirement, according to a new report from HSA Bank, “Health Savings Accounts: Bridging the Retirement Savings Gap.” Health care costs can range from $10,000 to $20,000 a year in retirement, and a 65-year-old couple retiring today can expect to pay $400,000 for health care, according to HSA Bank. And these expenses are expected to increase 5.5% a year—twice the pace of the U.S. inflation rate.

HSA Bank notes that are many advantages to HSAs, not least of which is the fact that HSAs are “triple tax advantaged.” Funds are contributed pre-tax, grow tax-deferred and withdrawals used for qualified medical expenses are tax-free. The Schwab Center for Financial Research estimates that because of these tax advantages, funds for health care from an HSA are 33% larger than funds from a 401(k) and 44% larger than a taxable account.

HSA funds roll over from year to year and can be retained by the account holder if they leave their employer. HSA funds can be invested, although only 3.8% of account holders are taking advantage of this opportunity. HSA funds can be used for long-term care insurance, and anyone can contribute to the HSA on behalf of the account holder, including an employer or family member.

HSA Bank notes that among companies with 5,000 or more employees, 89% now offer an HSA plan along with high deductible health plans (HDHPs). Among companies of all sizes, 70% offer HSAs. Citing a recent survey by the Plan Sponsor Council of America, HSA Bank notes that 75% of employers view HSAs as valuable tools for retirement saving.

Nudging Participants to Use HSAs for Retirement Health Care Savings

There has been progress in terms of individuals saving and investing more HSA funds. However, educating individuals about the benefits of an HSA and how it fits into a holistic retirement strategy is an ongoing process. In the first quarter of 2017, HSA Bank saw a 100% increase in HSA dollars moving from the FDIC-insured cash account into self-directed investments when compared to the same quarter a year earlier. This is an early indication more accountholders are turning to HSAs to help support their long-term savings goals.

Although there has been progress in the amount of funds put towards saving and investing, most HSA accountholders (96%) do not open an HSA investment account and start saving for retirement immediately upon enrollment.

HSA Bank says employers need to leverage their HSA service provider to design and implement a consistent, ongoing and personalized communication strategy to incrementally educate and ultimately change account utilization behaviors throughout the five phases of HSA account ownership. Using a combination of multimedia tools including video, emails, direct mail, infographics, and online tools, such as savings calculators to appeal to unique learning styles, accountholders should first be educated on the bene­fits of opening and funding the account.

For the accountholders who have progressed through these two critical steps, the next round of education should focus on accumulating a balance to cover the health plan’s deductible and out-of-pocket costs. Finally, accountholders may be educated about the power of investing to save funds for a healthy retirement.

Key factors to consider for a powerful HSA investment offering include the ability to setup recurring transfers to an investment account and a broad set of high quality and competitively-priced investment options with low or no investment minimums to get started. Many financial advisers and their employer clients also value the flexibility of an open-architecture investment solution, giving employees access to thousands of high-quality and low-cost options including exchange-traded funds (ETFs) and individual stocks and bonds, the paper says.