HSAs and Healthy Retirements
Health savings accounts have been available for people with high-deductible health plans since 2004. In addition to covering current out-of-pocket expenses, they’re also a powerful, tax-exempt vehicle for funding healthcare costs in retirement, especially when you consider that a 65-year old couple retiring this year will need $280,000 to cover healthcare and medical expenses throughout retirement, according to Fidelity Investments’ 16th annual retiree healthcare cost estimate.
Yet a new joint study by the LIMRA Secure Retirement Institute and the Insured Retirement Institute reveals that just one quarter of Americans plan to use their HSA assets to pay for healthcare and long-term care in their retirement years.
That finding came as no surprise to Judy Zaiken, corporate vice president and project director at LIMRA, who says it merely confirmed what the organization had already hypothesized, based on the woeful number of eligible Americans enrolled in HSAs and the misconceptions surrounding their usage.
According to the Employee Benefit Research Institute, roughly 17 million Americans had HSA-eligible health insurance plans in 2014, but just under 14 million of them had opened an HSA. Those who had enrolled in an HSA didn’t even come close to their allowable annual contribution. In 2016, EBRI found the average balance was just over $2,900, considerably lower than the $3,350 allowed for individuals and $6,750 for families that year. (The 2018 annual HSA contribution limit is $3,450 for individuals and $6,900 for families.)
Rather than saving that money for post-retirement needs, Zaiken says, HSA participants overwhelmingly opt to spend it now. They treat their HSA as a bank account, paying for current medical expenses, rather than investing the funds and allowing them to build for the future. In 2016, just 6 percent of HSA assets were in investment accounts, according to EBRI.
While “deferred gratification” is clearly not their preference, Zaiken says, HSA participants often avoid saving their funds because they confuse the parameters of an HSA with those of a flexible savings account, where “use it or lose it” is the mantra. Indeed, 40 percent of Americans believe their HSA balances must be spent by the end of the year or be forfeited, according to the new study.
That misconception is reinforced by the way participants are given access to—and encouraged to use—their HSA funds, according to Shane Bartling, a senior retirement consultant at Willis Towers Watson.
“The fact that people receive debit cards to help spend the HSA isn’t consistent with the notion that you should preserve those assets,” says Bartling. “It’s very tempting and easy to reach for that debit card when you have an eligible expense that you can tap into that account.”
While the growing body of research surrounding employees’ usage of HSAs is certainly disappointing, it also presents a clear opportunity going forward, according to Roselyn Feinsod, the East region practice leader at Aon. With the average employee facing a significant gap in terms of retirement adequacy, Feinsod says there’s a definite need to employ a combination of retirement vehicles, including HSAs and defined-contribution plans to help close that gap.
“There is a huge opportunity in the financial well-being space to take some great leaps forward and make sure the investment vehicles are better understood,” says Feinsod. “This is absolutely the time.”
With just 51 percent of respondents saying they are knowledgeable about HSAs, there is a widespread need for greater education and awareness. Feinsod believes plan sponsors should take a page from the DC-plans playbook and employ strategies such as auto-escalation in the HSA space. Meanwhile, Bartling advocates for using “very tangible terms” for describing the value of saving HSA funds for healthcare costs in retirement.
“We often fall back to describing it in a way that is purely dollars, which underplays the effectiveness and power of these vehicles,” says Bartling. “We emphasize the ability to describe it in terms of months or years of financial independence that can be achieved by preserving these assets.”
As plan sponsors seek to paint that picture for participants, they would be wise to adopt a segmented approach that targets those portions of the workforce with an admittedly lesser understanding of HSAs, says Bartling. The LIMRA/IRI study found that wealthier households, married workers, men and people with children are more knowledgeable about HSAs. Therefore, the opportunity lies in targeting women, singles and low-to-middle income earners.
“There’s a dramatic underappreciation for how big healthcare costs will be in retirement and the fact that an HSA can serve multiple objectives,” says Bartling. “Tailoring your story to different workforce segments and highlighting the flexibility of an HSA will help bolster their appreciation for just how powerful these vehicles are.”