Five HSA facts all plan sponsors should communicate to their employees

Five HSA facts all plan sponsors should communicate to their employees

a female doctor sitting with patient

The evidence is in: Health savings accounts can be a win-win for employers and employees. A new white paper from the Empower Institute, "The New Rx for Retirement,” demonstrates the benefits of HSAs and recommends the best ways for employees to incorporate them into their retirement planning. It also highlights the importance of employers encouraging employees to participate in HSAs.

Employers who offer HSAs may benefit from a more financially secure workforce. The white paper shows that employees who use HSAs as a long-term financial planning tool consume healthcare more efficiently over time, saving money both for themselves and for their employers. The exemption of HSA contributions from FICA tax also results in significant employer savings.

As of June 2017, more than 21 million employees held an HSA, 16% more than the previous year.1 Still, employers can do more to educate their employees about the benefits of HSAs. Here are five facts about HSAs all plan sponsors should communicate to their employees.

1) Retirement healthcare costs are on the rise
Healthcare costs are trending upward, and the future of health insurance remains uncertain. What's more, people are living longer, leading to longer retirements that only add to the financial challenges of healthcare. The average 65-year-old couple retiring in 2017 could expect to spend more than $400,000 on healthcare according to a HealthView Services report.2 Under these circumstances, it's crucial that employees save more money today.

HSAs allow employees to save specifically for healthcare. Rather than bundling healthcare savings with the rest of their savings, employees can set aside money they know will go toward medical expenses. Directing savings toward specific expenses, a practice known as expense diversification, can be just as important for pre-retirees as investment diversification.

2) HSAs can save employees thousands of dollars
Some employees may be hesitant to participate in an HSA because doing so requires enrolling in a high-deductible health insurance plan. But the lower premiums of HSA-eligible plans may allow employees to save for that higher deductible, and the money they put into HSAs can grow paycheck to paycheck and year to year.

In addition, HSAs give employees a triple tax benefit: Participants can contribute pretax money, generate tax-free investment earnings and take tax-free withdrawals for qualified expenses at any time. Many HSA contributions also are exempt from FICA tax, resulting in an extra 7.65% in tax savings.3

Over time, using an HSA alongside a retirement plan may add several thousands of dollars of purchasing power in retirement without affecting take-home pay now. The degree of the benefit depends on the employee’s income, savings rate and years until retirement as well as other factors. According to Empower Institute calculations, a hypothetical employee who is 25 years from retirement and saves 10% of their income could gain an additional $81,000 by the time they retire after directing a portion of their savings to an HSA.4

3) HSAs are flexible
HSAs also offer employees a high degree of flexibility. Holders of HSAs are allowed to withdraw money at any time to pay for deductibles, copayments, hospital care and other out-of-pocket costs. If there is money remaining in the account at the end of the year, it rolls over for future use and continues to be exposed to potential growth. Plus, beginning at age 65, HSA holders can withdraw funds for any reason (though they may owe ordinary income tax on such withdrawals).

4) It's important to optimize your retirement savings
Not all employees may realize HSAs can be used in conjunction with workplace retirement plans. In fact, using both is a great way to boost retirement savings — but this approach should be taken strategically.

The Empower savings optimization model directs each available dollar to a particular savings vehicle based on that dollar's most efficient projected future value. Research discussed in the white paper found that if an employer offers a match, employees at nearly all tax rates should consider contributing first to their retirement plan up to the maximum matched contribution. Additional savings dollars should go in the HSA up to the maximum amount, and any remaining dollars should go to the retirement plan up to the annual contribution limit. (Only employees with high tax rates whose employers offer a match below 50% should consider contributing to the HSA first.)

If an employer does not offer a match, employees should consider contributing first to the HSA up to the maximum contribution amount, with additional savings dollars going to the retirement plan up to the annual limit.

5) Participating in an HSA is easy
Some employees may be reluctant to sign up for yet another savings plan. Employers have an important role to play in educating their employees about HSAs' many benefits and ease of use. Plan sponsors should inform employees about optimal contribution order and make it easy for employees to adjust contributions to their retirement plan and HSA. Allowing participants to access personalized cost projections makes it even easier for them to save.

For both parties to reap the many benefits of HSAs, employers must engage employees, many of whom may be hesitant to act. This engagement starts with educating employees about how and why to use HSAs.

“EMPOWER” and all associated logos, and product names are trademarks of Empower Annuity Insurance Company of America. This material is for informational purposes only and is not intended to provide investment, legal or tax recommendations or advice. ©2023 Empower Annuity Insurance Company of America. All rights reserved.