A gift to our health

Una Morabito

By Una Morabito
Una Morabito is Head of Client Management for the Workplace Solutions unit of MassMutual.
Posted on Oct 9, 2019

When the federal government created Health Savings Accounts (HSAs), it was a toast to our good health. Yet the promise of these powerful financial tools, created in 2003 by an act of Congress, has largely gone unfulfilled.

A HSA is a medical savings account available to workers covered by high-deductible healthcare plans to help them save, pay and plan for costs associated with medical care. Workers contribute pre-tax dollars to the accounts, which allow tax-deferred growth much like a 401(k) plan and tax-free withdrawals if the funds are used strictly for medical expenses. Few if any other financial vehicles allow similar tax-advantaged treatment.

Contributions may be made by employees, employers or both, and the account is owned by individual employees. In 2019, a single person and his or her employer can contribute a combined total of $3,500 into a HSA annually while the limit for contributions for a family is $7,000. Those who are age 55 or older can earmark an extra $1,000 into an account.

Participation in HSAs skyrocketed in 2018, climbing to 81 percent of eligible employees from 50 percent the year before, according to research from Benefitfocus, a benefits enrollment, administration and engagement firm.1 So why the sudden increase?

Workers are starting to better understand these benefits but are still not tapping their full potential. While many people use their annual contributions for current medical expenses, the real value of HSAs is the ability to accumulate larger dollar amounts over several years in anticipation of much-higher costs of medical care in retirement. That’s because contributions to HSAs carry over year-to-year, may be invested to earn compound interest for greater accumulation potential if they meet minimum requirements, and can be used tax free for eligible medical expenses in retirement.

While no additional contributions can be made once the employee who owns the account enrolls in Medicare, any money remaining in the account past retirement can continue to accumulate and be used for medical expenses. Money withdrawn from a HSA for non-medical expenses before age 65 are subject to income tax and a penalty; money withdrawn for non-medical expenses after age 65 are subject to income tax but no penalty.

For example, a 40-year-old employee who contributed the maximum amount allowed for both he and his spouse each year could accumulate a hypothetical $462,907 by age 65. That figure assumes an average annual investment return of 7 percent with no withdrawals until retirement and no additional contributions of $1,000 annually at age 55.

It’s no wonder that employers are viewing the availability of HSAs on their benefits platforms as crucial to employees’ short- and long-term financial wellness. While adoption is high, HSAs are still misunderstood and often under-utilized by many people who could benefit from this valuable financial tool.

The Employee Benefits Research Institute (EBRI) in 2018 reported that contributions to HSAs overall were relatively anemic. Consider that individual contributions in 2017 averaged $1,949, according to EBRI .2 Only 13 percent of account holders contributed the fully allowable annual amount.

Most of the money is being eaten up by current medical costs. Three-quarters of HSA participants not only made withdrawals in 2017, the withdrawals nearly equaled contributions, according to EBRI. Only 4 percent of HSAs had invested assets other than cash, which means most people still view HSAs as a short-term solution rather than a longer-term hedge against six-figure medical costs in retirement.

It’s an opportunity for more education. Employers can help by including information about the long-term potential of HSAs as part of educational workshops on preparing for retirement. If employees are learning about how to make the most of their 401(k) plan, why not include a discussion about the value of HSAs as well?

Helping workers understand the potential costs of healthcare they face in retirement may be a significant motivator to contribute to their HSAs. It is estimated that the average couple will need $285,000 in today's dollars for medical expenses in retirement, excluding long-term care, according to Fidelity .3

As we age in retirement, healthcare may become our biggest challenge, physically, emotionally and financially. With the right lifestyle, financial preparation and some good fortune, healthcare may be less of a concern.

Here’s a toast to a long and healthy life with a HSA account to smooth the way.

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1 BenefitFocus, “State of Employee Benefits,” 2018.

2 Employee Benefit Research Institute , “Health Savings Account Balances, Contributions, Distributions, and Other Vital Statistics,”, 2017.

3 Fidelity Benefits, “How to plan for rising health care costs,” 2019. Estimate based on a hypothetical couple retiring in 2019, 65 years old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Actual expenses may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

The information provided herein is not written or intended as specific tax, investment or legal advice. MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.