By Andrew Frend
There is a retirement health care savings crisis in the U.S. Industry research shows that 40% of American workers lack confidence that they will have enough money to take care of their medical expenses when they retire. Now factor a global pandemic into the equation, and it’s not surprising people are looking for solutions to help them plan for medical costs today and in the future.
Health Savings Accounts, or HSAs, are a powerful tool that can help American workers take control of their health and financial wellness needs during these unpredictable times. However, despite there being more than 29 million HSAs in the United States, new Voya research indicates that HSAs are often misunderstood and underutilized with only 2% of people aware of the key attributes of an HSA.
With open enrollment underway for millions of American workers, now is the perfect time to take a closer look at HSAs as you consider all the workplace benefits offered by your employer.
What is an HSA?
An HSA is a medical savings account that’s available to you when you’re enrolled in a qualified high-deductible health plan (HDHP). With the rising costs of health care, an increasing number of companies started offering HDHPs in their employee benefits packages. Prior to the pandemic, industry research from the Employee Benefit Research Institute showed that nearly half of Americans (46%) with private health insurance were enrolled in a HDHP.
Typically, most HDHPs are combined with an HSA, which is funded by pre-tax dollars that are deposited into your account, usually through a payroll deduction. As a result, HSAs have increased in popularity in recent years to help pay for qualified medical costs, while also helping employees plan for and cover the high deductibles associated with these health plans.
HSAs offer triple tax advantages
Perhaps the biggest benefit of an HSA is the triple tax advantages it offers: 1) contributions are pre-tax and reduce your taxable income; 2) your HSA contributions and any earnings grow tax-free; and 3) when used to pay for eligible medical expenses, HSA withdrawals are tax-free.
HSA contribution amounts are capped each year by the IRS. For 2021, the HSA contribution limits are $3,600 for individuals and $7,200 for family coverage. Individuals who are 55 and older are eligible for an additional $1,000 catch-up contribution.
You own your HSA
Most people do not realize that when you enroll in an HSA through your company it’s not tied to your employment, unlike your health insurance plan or flexible spending account (FSA). Your HSA is portable — meaning you own the account. Therefore, if you get laid off, furloughed from your job or chose to leave, your account and funds stay with you and you can always use your HSA dollars to help pay for qualified medical costs.
New legislation makes it easier to use HSA dollars
Back in March, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help Americans impacted by the pandemic. As part of this legislation, HSAs can now be used to purchase certain over-the-counter medical products and medicines — including those needed in quarantine and social distancing, and feminine hygiene products — without a prescription from a doctor.
The CARES Act also expanded coverage of telehealth services. Specifically, it now includes a provision that allows HDHPs to cover telehealth services before the deductible has been met. Previously, the IRS had not allowed these expenses to be reimbursed under a HDHP until the plan’s deductible had been reached.
These provisions are temporary, with a scheduled sunset date of December 31, 2021.
HSA funds are not “use it or lose it” accounts
One of the biggest drawback surrounding FSAs is the “use it or lose it” rule. In most cases, you must spend all the tax-free funds you put aside in an FSA before the end of each plan year, or risk losing the money. People often get confused and think the same rule applies to HSAs. However, unlike an FSA, your HSA balance carries over each year, which can add up over time.
HSAs funds can be an investment opportunity
Once you reach a certain threshold in your account, your HSA funds can be invested. These investment options are similar to line-ups available in typical workplace retirement accounts, like a 401(k). Like with any investment, it’s important to remember there is always risk. With that being said, HSAs can serve as a powerful vehicle to help grow your future savings.
HSAs can double as emergency health care savings
Industry research shows that roughly 4 in 10 Americans would struggle to cover a $400 emergency expense. Faced with a short-term, unexpected need — such as a trip to the hospital — many people often “dip in” to their retirement savings. Voya’s own customer data shows that nearly one-third (32%) of retirement plan hardship withdrawals are due to unreimbursed medical expenses.
Fortunately, the funds in an employee’s HSA can double as an emergency savings account. All HSA withdrawals used to pay for qualified medical expenses (even if unplanned) are tax free. Plus, when enrolled in an HDHP and HSA, you can choose to cover a medical bill “out of pocket” and then be reimbursed tax-free for that expense in the future. This strategy is another way HSAs can serve as a potential emergency savings vehicle. Just make sure to hold on to your receipts to verify all distributions.
HSAs can help close the retirement health care savings gap
According to the Employee Benefits Research Institute, to have a 90% chance of covering premiums and median prescription drug expenses throughout retirement, a 65-year-old man needs $148,000 and a woman needs $161,000. Therefore, couples retiring at age 65 will then need $296,000.
Since HSA funds rollover, can be invested and potentially grow each year, an individual could put money into their HSA for 20 or 30 years and have the potential to be better prepared to help close this retirement health care savings gap. Plus, when a person reaches retirement age at 65, those HSA funds can then be used to pay for general living expenses — housing, food or travel, for example — and will be taxed like any normal distribution from a retirement account. And finally, unlike a 401(k) or an IRA, there are no required minimum distributions that need to be taken from an HSA. This means you are not forced to spend your HSA dollars until you need them in retirement.
With COVID-19 top of mind for most Americans, Voya research found that more than two-thirds (71%) of American workers indicated they planned to spend more time reviewing their voluntary benefits during open enrollment this fall. If your employer offers a HDHP, I would strongly encourage you to take a closer look at HSAs. If your enrollment period has ended, don’t worry — you can always change your HSA contribution at any time during the year. You’re not “locked in” to the amount you selected during your open enrollment period.
Therefore, no more excuses to put off getting smart on HSAs. In today’s unpredictable world, it’s one way to take control of your health and financial wellness needs — to help live for today, while planning for the future.
About the Author: Andrew Frend
Andrew Frend is the senior vice present of Product and Strategy for Employee Benefits at Voya Financial. Voya’s Employee Benefits business offers stop loss, group life, disability and supplemental health insurance products through the workplace, as well as health savings and spending accounts, to businesses covering 6.2 million individuals through the workplace. Frend is also the head of enterprise financial wellness solutions at Voya.
Frend has nearly 20 years of experience in the employee benefits industry, including leadership roles with ADP and Mutual of Omaha. Andrew has very broad experience, from running sales offices on the West Coast to heading product lines with P&L responsibility.