Health Savings Accounts as a Retirement Tool
By Kathy Ames Carr
It's never too early to begin planning for the future, especially when that future may come with at least a five-figure price tag in out-of-pocket medical-related expenses.
Total projected health care costs for a 65-year-old retiree today average $146,400 if he or she lives 20 more years, and those who retire a decade earlier might incur total costs of $372,400 by age 85, according to the Health Care Cost Institute.
Out-of-pocket spending represents about 13% of health care expenses. Consumers should expect to come up with more of their own money to pay for health care needs as both Medicare and employer-based retiree health programs face cutbacks.
The average net retirement savings of a man or woman ages 55 to 64 is $69,000 at retirement, said Kevin McKechnie, executive director of the American Bankers Association's HSA Council. “How and when do you know to start saving to prepare for these costs?” he said.
The trend of employers offering high-deductible health care plans with health care savings accounts can, however, work in future retirees' favor and help account for those hefty out-of-pocket costs, according to local benefits managers and wealth planners.
An HSA allows account holders to make annual pretax contributions of $3,300 for an individual and $6,550 for a family, which can be used to pay for current health care costs, including deductibles. But if the user keeps intact that savings, any gains compound tax-free, and once the investor reaches age 65, he or she can apply tax-free withdrawals toward qualified medical expenses.
“Employers who are increasingly offering the high-deductible health care plans can promote this account as a benefit,” McKechnie said. “Some are even incentivizing employees with HSA seed money.”
As a way to incentivize its employees, Sherwin-Williams contributes $400 annually for a single enrollee or $800 for the family high-deductible health care plan. That health plan, one of three that the Cleveland-based Fortune 500 company offers, has about a 23% participation rate, according to Dave Mansfield, vice president of employee benefits.
Healthy enrollees who perhaps only need to pay a couple hundred dollars toward their higher deductible could pay that on their own, without dipping into their HSA, and focus on building a medical expense nest egg, he said. Otherwise, those who opt for lower deductible plans face paying higher premiums.
“Why pour money into paying premiums when you can pour it into an HSA?” said Mansfield, who spoke in January at the Union Club on HSAs as a wealth-building tool.
Robert Rogers, principal of Findley Davies, said many of the human resource consultant's clients that offer account-based health plans are contributing annually to their employees' HSA coffers, with the hopes that employees will do the same.
“It's also their way of recognizing that their employees' deductible has gone from $200 in a traditional plan to $2,000 in their high-deductible plan, and they want to continue subsidizing some of their employees' health care costs,” said Rogers, noting his clients range from 50-employee small businesses to firms with more than 100,000 employees.
Erica Aber, vice president and portfolio manager of Beachwood-based Spero-Smith Investment Advisers, said she advises clients to carefully research the HSA's investment options. Because banks, credit unions, insurance companies and financial institutions all offer HSAs, and each custodian has its own policies and fees.
Some are tied to savings accounts with lower interest rates, while others invest in stocks or mutual funds, which have the potential to yield a greater rate of return.
Account holders who access their HSA for nonmedical needs prior to age 65 pay a penalty and are taxed at their income rate; after age 65, the funds can be used for nonmedical expenses without penalty, although ordinary taxes will apply.
Aber encourages people to spend down an HSA balance after age 65 for tax purposes. “If you die and leave your HSA to a nonspousal beneficiary, that person has to pay taxes on it depending on their income level,” Aber said. “But if you leave an IRA, the beneficiary can stretch that money out over a lifetime, which reduces their tax obligations.”
The prevalence of high-deductible plans and HSAs is expected to grow, especially as health care costs increase. Rising costs associated with the Patient Protection and Affordable Care Act are prompting employers to make changes to their health care plans.
In fact, 73% of employers offer account-based health plans, and that number is projected to rise another 9% in 2015, according to a 2014 Towers Watson/National Business Group survey.
Only about half of employers surveyed offered those plans prior to the ACA's passage in 2010. An account-based plan — which ties a deductible with a personal account, such as an HSA or health reimbursement — help employers hold down health care costs.
Nearly 16% of survey respondents only offer this type of health plan — up from 7% in 2012 — and that figure is expected to nearly double to nearly 30% in 2015.
Jason Masony, senior health and group benefits consultant for Cleveland-based Towers Watson, said he expects HSAs to become more commonplace in investment portfolios.
Indeed, Generation X and Y employees are finding attractive the high-deductible plans with health savings accounts (the minimum of which is $1,250 for a single and $2,500 for a family) because of the account's portability. These generations tend to jump jobs every couple of years, and because they can take the HSA with them, the vehicle in some cases becomes more than just a crutch to pay for imminent health care expenses.
“Unlike generations before them that stayed with the same job for 30 years and earned a pension, these younger workers have the 401(k) and understand what it means to save for their future,” Masony said. “More of these workers are discovering that the HSA can be a powerful wealth-building tool.”