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HSAs: Health Care or Retirement Savings?

That depends. When HSAs became available in 2004 as a complement to high deductible healthcare plans, the premise was that individuals and families could make tax-deductible contributions and use the funds to pay unreimbursed medical expenses. With the increase of high deductible health plans as an option, and in many cases the only option for employer sponsored health care, participation in HSAs has increased to 22 million accounts with $45.2 billion in 2017, according to a study by Devenir Research.

To encourage establishing an HSA and thereby enrolling in a high deductible health plan, many large employers will contribute to HSAs. 41% of new HSAs in 2017 were opened as a result of a direct employer relationship. So why wouldn’t anyone who is a participant in a high deductible health plan set up an HSA? Tax-deductible contribution limits for 2018 are $3,450 for individuals and $6,850 for families, with an additional $1,000 catch-up contribution for an account with an individual age 55 older.

Many people do participate. In fact, of the estimated $27.6 billion that was contributed to HSAs in 2017, approximately $22.6 was withdrawn leaving an 18% account balance retention rate. Glancing at the contribution and withdrawal figures might look like the balances in HSAs were not growing significantly. But that’s not the case. The account balance retention rate coupled with the funding of HSAs for longer periods of time indicate that HSA participants, especially those with higher incomes, often view these accounts as supplemental retirement accounts. Rather than spend the assets in these accounts, participants continue to make tax-deductible contributions, allow them to accumulate tax deferred, and pay unreimbursed medical expenses with other funds. Contributions to HSAs aren’t permitted past age 65. At that point, account owners can withdraw funds tax-free for any number of qualified medical expenses, Medicare premiums, long term care premiums, and qualified long term care services. As is the case with IRAs and 401ks, these tax free account balances can grow considerably over time providing additional retirement or health care assets.

Note that there is a population of lower paid employees who can’t afford to contribute to an HSA, whether for health care or retirement savings objectives.

If you are a participant in a high deductible health care plan, should you establish an HSA and earmark the assets as a supplemental retirement plan? At the very least, you should set up an HSA if your employer contributes to it. In a broader financial planning context, determine your unreimbursed medical expenses and see what the advantages may be of not using HSA contributions to pay them. You may find that keeping HSA contributions in the HSA may be a better strategy.

 

 

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