Why HSAs have become a valuable tool in retirement planning

Health savings accounts (HSAs) have become a popular way to pay for health care. And thanks to a growing understanding of their tax benefits, they are also starting to be seen as a worthwhile addition to any retirement plan.

According to a report from HSA consulting firm Devenir, more than $24 billion was deposited into HSAs in the United States in 2014 — up $5 billion from the previous year. In the same time, the number of actual accounts rose 22 percent to almost 17 million.

“HSAs are a great way to supplement retirement savings, but the concept is still new for some employees,” says Amber Hulme, Medical Mutual vice president, Central and Southern Ohio. “That’s why it’s important for employees to understand how HSAs works, so they can take full advantage.”

Smart Business spoke with Hulme about how HSAs work, why they are getting so popular and what makes them such a valuable tool for employees trying to plan for retirement.

What are the basics of an HSA?

HSAs can be used with certain types of high-deductible health plans. The IRS has rules for which plans qualify. For 2016, plans need to have a deductible of at least $1,300 for individuals and $2,600 for families.

The IRS also limits how much money can be contributed to an HSA per year — $3,350 for a single person, $6,750 for a family. Employees who are 55 or older can contribute an extra $1,000 each year.

Why are they getting so popular?

The biggest reason is the tax advantages. When employees open an HSA, they can defer money from their paycheck into their account tax-free. That also applies to any contributions their employer makes. The money can then be used to pay for approved medical expenses without paying taxes. Any money left over stays in the account, earning interest tax-free.

Eventually, employees can use the money they have accumulated to invest in stocks, bonds or mutual funds. Any profits, whether from dividends or capital gains, are nontaxable. HSA administrators might have rules about minimum balance before investments are allowed, but it’s usually not more than $2,000.

How do HSAs work in retirement?

HSA funds can always be used, tax-free, to pay for approved medical expenses. When employees turn 65, they aren’t subject to the early withdrawal penalty, which is usually around 20 percent. So they can choose to spend the money on other things, like travel, and only pay the taxes.

If they enroll in Medicare, no more contributions are allowed, but the money in the HSA can be used to pay the premiums — with no penalty and no taxes.
Medicare Supplemental (Medigap) policies have different rules, so that option isn’t available.

What are good ways to encourage employees to use their HSA?

Employer contributions are a great way to drive employee participation and gain acceptance in HSAs. That’s especially true for employees who are transitioning from a more traditional type of health coverage to a high-deductible plan.

Otherwise, employees just need to understand how HSAs work and all of the financial benefits they can offer. That’s why education is so important. The organization’s insurance carrier or HSA administrator can provide a wealth of resources to help make sure employees use their accounts as effectively as possible.

Are any other important trends developing?

Traditionally, HSAs have been accessed separately from a member’s health plan, either through a bank or another type of financial institution. But as consumers take more control of their health care, they want more connectivity and ease of use.

In response, many insurance carriers, including Medical Mutual, are moving toward platforms that let members review their HSAs and claims information in one place. This integration will help consumers be more engaged in their health care costs, and more empowered in their retirement planning.

Insights Health Care is brought to you by Medical Mutual