Health Savings Accounts (HSA) were established in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act to provide a tax-free platform of funding for medical expenses not covered by insurance. A health savings account is a bank account that is earmarked for medical expenses. The funds accumulate over time, don’t have to be spent every year, and remain with the employee regardless of job changes. The funds could accumulate for decades. Within the next year or two, a majority of large companies, as well as many small businesses, are likely to offer an HSA. Unlike traditional health insurance plans, HSAs require full funding of medical expenses by the insured via the HDHP until the deductible is met. Once that limit is fulfilled, the HDHP usually covers 100% of eligible medical expenses. Employees contribute to the health savings account, and that contribution is tax exempt up to a predefined annual limit. Moreover, many employers contribute to each employee’s account. Employees and employers also enjoy the immediate benefit of significantly lower monthly premiums.
Everything we’ve covered so far is relatively common knowledge with regards to the health coverage portion of HSAs, so now it’s time to delve into a big benefit that is often overlooked, if not entirely ignored. HSAs offer an excellent retirement benefit. First, because employees are paying less for their portion of the monthly insurance premium, that extra cash can be diverted into the HSA. Then the money placed into the HSA is tax exempt up to the predefined limit set by the Internal Revenue Service (IRS); the gain on that account’s investment is also tax exempt. Further savings can include the tax exemption from state income tax, as a few states follow the guidelines established by the IRS. All of this sounds pretty good, and we’re not even done yet. Remember, preventative care is covered at 100%; so the money previously spent on copayments for routine physicals, immunizations, etc. is no longer necessary (another opportunity to divert money into the HSA). If the employer contributes to the account, employees receive that as tax-free cash. Below is an example of how the numbers can breakdown:
Family of four with an annual income of $120,000
- $1,200 – lower premium
- $300 – preventative care
- $1,687 – federal income tax
- $500 – FICA
- $2,000 – employer contribution
- $558 – gain on investment – 10%
- $6,245 – saved and/or made in one year
Assume this is a family with no major medical issues, thus are receiving all preventative care at no charge. In just two years there is enough in the account to cover the deductible. In five years, the HSA will be worth $30,000+ and over $62,000 in ten years. In 30 years, when it’s time to retire that account could be valued at $185,000+.
With these numbers, it’s easy to see why an HSA account is a windfall to future retirees. More so because medical costs for seniors are rising at a rapid rate. Having a solid cushion of money set aside for those medical costs means traditional retirement accounts don’t have to be depleted, and can be used for living and leisure expenses.
The question is why isn’t anyone talking about this significant benefit? There are a few potential reasons. Although HSAs have been around for a while, they have only recently started to become part of the conventional employer-based health insurance offering. Most C-level decision makers are working with health and welfare benefits consultants. While those consultants are very adept in the health-related portion of HSAs, they are not licensed to discuss the investment side. Furthermore, because most executives don’t think of the investment side of an HSA, little investment strategy is applied to accounts, which is not the case with 401k or pension type accounts. Finally, when HSAs are introduced to employees, the retirement benefits are not part of the conversation. Thus employees don’t realize what they can gain from an HSA. As more educational materials on HSAs become available, more employers and employees will begin to see that an HSA is so much more than a health insurance policy.