While most employees are familiar with, and may even use, a health savings account (HSA), there’s a good chance they aren’t reaching the full potential of the account. Average contributions are just above the minimum allowable deductible amount for family coverage and less than half of the contribution limit for family coverage. This means that the average accountholder’s total contribution (including their employer’s contribution) could cover their deductible, but only if their HDHP has the lowest possible deductible, and not much else.

You may be wondering why these statistics suggest that employees aren’t reaching the full potential of their HSAs, especially if they’re covering the deductible? The answer to this is that while HSAs are a great way to cover current medical expenses, HSAs are also a great long-term savings vehicle that can be used for retirement planning.

When an accountholder is focusing primarily on using their HSA on current medical expenses, they’re missing out on a key tax savings: the balance growing tax-free. There’s really two key ways an existing HSA balance can grow – through the general accumulation of interest or through investing. When someone has an HSA with EBC, they can choose to have their balance in a traditional interest-bearing account or a high-yield HSA, which has a higher interest rate that allows their balance to grow quicker. In addition, they can invest funds once they have a minimum $1,000 balance and that money grows tax-free. When an accountholder does not contribute more than they need to cover current expenses, they’re missing out on valuable tax-savings they receive from HSA growth. This growth is an excellent way to prepare for retirement.

Increasing Need for Health Care

As people age, their need for utilizing health care services generally goes up. According to the Centers for Disease Control and Prevention, Americans aged 65+ visit physicians an average of 5.5 times per year, compared to 3 times per year for the 45-64 age group, and 1.7 times per year for 18–44 age group. More frequently visiting the doctor as one ages, paired with rising health care costs illustrates the need to save for health costs. That begs the question: how much does one need to save for health costs?

While it will vary depending on individual circumstances, Employee Benefit Research Institute estimates that an average couple retiring at age 65 must have $296,000 saved to have a 90% chance of not running out of money. This includes health costs such as Medicare premiums, Medicare deductibles/copays/coinsurance, dental, vision, hearing expenses, and services beyond the Medicare limits. While this is a daunting statistic, an HSA can cover most of those costs. Setting aside funds now for costs incurred later can save on the stress of worrying about whether there will be enough money for health care during retirement.

Excellent Complement to a 401k

The first accounts most people think of when it comes to retirement is a 401(k), 403(b), or an IRA. An HSA is an excellent complement to these plans to help offset future health care costs because it receives more tax benefits than traditional retirement accounts. An HSA is the one of the only benefit accounts that allows tax-free contributions, earnings, and distributions. Because of these savings, the Employers Council on Flexible Compensation found that an HSA covers six more years of health expenses when compared to Roth and tax-deferred accounts.

Getting Started

One of the most important first steps an individual can take is to take a step back and determine their financial goals. If someone wants to ensure they are preparing for retirement and will be able to cover health care costs, they may want to consider the following:

1. Make (and maximize) HSA contributions. Accountholders are able to contribute up to a statutory maximum, which is $8,300 for family plans, and $4,150 for self-only in 2024. Participants who are 55 or older can contribute an additional $1,000 per year.
2. Enroll in a limited health FSA. Employers often choose to offer a limited health FSA to cover vision and dental expenses for employees on a high-deductible health plan (HDHP). Employees can contribute to and utilize the FSA to focus on current expenses, use their HSA as a true savings account, and let their balance grow.
3. Invest funds. Of all HSA accountholders, only about 12% have any of their funds invested and these accounts have an average total balance of $16,220, which is nearly seven times higher than HSAs with funds in a cash account. Investing funds is a great way for an employee to make their money work for them.
4. Start contributing now. The sooner someone starts to contribute to their HSA, the sooner their HSA balance can start building for retirement. When accountholders earn, their interest is compounded, making time a crucial factor in setting themselves up for financial success later. Contributing when they are younger, even if they can’t contribute the maximum amount, helps create a nest egg and interest begins to compound immediately.
5. Minimize use of the account. To fully take advantage of earning interest and letting funds grow, accountholders may want to consider minimizing the use of their HSA account during their earning years. Using a limited health FSA is a great way to help achieve this. Some accountholders may also choose to pay for eligible HSA expenses out of pocket, save their receipts, and deduct those expenses from their HSA at a later date.

In all, it’s impossible for someone to know exactly how much money they’ll need to comfortably retire or what types of health concerns will come. Employees can use and optimize an HSA to try and be as prepared as possible when retirement does come around. Do your employees have more than one active HSA? There are great benefits to both employers and employees when they consolidate their HSAs. Learn more in our recent blog on HSA transfers: www.ebcflex.com/hsabulktransfer.