More Participants Contributing to Both 401(k) and HSA

In light of surging health care costs, an HSA can serve as an important component to a holistic retirement-planning strategy.

Despite the worry that participants in high deductible health plans (HDHP) with health savings accounts (HSAs) cannot afford to contribute to both the HSA and their 401(k) plans, research by Fidelity Investments finds the opposite. Its clients’ participants who contribute to both vehicles on average defer higher rates (10.6% in 2016) to their 401(k)s, than those saving in only their 401(k)s (8.2% in 2016). Moreover, the firm finds that the overall number of employees contributing to both a 401(k) and an HSA increased by 21%.

“We continue to see people participate at higher levels every year, and we continue to see the deferral rates increase,” explains Will Applegate, vice president, Fidelity Investments.

A recent study by United Benefit Advisors (UBA) reflects these findings. According to the firm’s survey, HSA enrollment is at 17%, marking a 25.9% increase from 2015, and nearly a 140% increase from five years ago. Moreover, a study by Devenir projects that by the end of 2018, the HSA market will exceed $50 billion in assets among more than 27 million accounts. 

But despite these findings, there is still much in the HSA space that can be remedied. Among participants, there are still several misconceptions surrounding HSAs. In fact, Fidelity finds that only three out of ten employees surveyed know that HSA money rolls over year after year. For many participants, misconceptions like this present road blocks preventing them from preparing for what is likely to be the most burdensome expense in retirement: health care.

According to Fidelity’s research,  a 65-year-old couple that retired in 2016 would need an estimated $260,000 to cover medical expenses throughout retirement. Couple that with rising health care costs and the uncertainty of the country’s health insurance system, and today’s employee is looking at a bitter pill to swallow.

NEXT:  Statistics may work to a plan sponsor’s advantage.

“A lot for our clients are continuing to raise awareness around the costs of health care in retirement, and the fact that the HSA can be a great vehicle to begin addressing that need,” explains Applegate. 

An effective communication strategy can come a long way. Applegate suggests a heavily targeted approach. New employees or those not enrolled yet can be presented with just the basics benefits of HSAs: triple-tax advantages, the ability to use the money now or in retirement, and the chance to use premium savings already garnered from an HDHP.

“For those people engaged but not really contributing, we’ll encourage them to consider contributing up to the plan deductible, or up to the out-of-pocket maximum, and ultimately up to the IRS limit,” says Applegate.

Those saving at the age of 65 or older can also use HSA money to pay for non-medical expenses if they pay the deferral income tax.

But it’s important to place emphasis on participants more subject to inertia.

“Those that are taking the leap and taking advantage of the HSA option tend to be overall better at savings to begin with,” says Applegate.

Another challenge, however, is getting employees to enroll in an HSA-eligible health plan. “We’ve even seen employers do things like not referring to the insurance component as the high deductible plan because that can scare people, but rather as the health savings plan.” He adds that even removing all other options and only offering the HSA-eligible component could be an effective option.

But ultimately, the strategy has to boil down to the easiest and simplest way to present the potential benefits of what an HSA is, and explain what it is not.

“It’s critical to dispel those myths behind HSAs,” says Applegate. “HSA money does roll over and can be used in retirement, which many people still don’t know. And it can be invested, and it is one of the most tax efficient vehicles out there.”