Do You Know the Way to HSA?
With the rapid growth in high-deductible health plans, health savings accounts provide an option to pay medical bills and save for the future.
'The best way to retire is to not put all eggs into one basket.'
Corey Barnett is an avid saver, but doesn’t like the idea of stashing his retirement reserves in one place.
That’s why when he left his steady job to create a digital marketing company in February 2014, the 25-year-old rolled his 401(k) into an individual retirement account and specifically looked for a high-deductible health plan so he could continue using his health savings account as a way to pay for current medical bills as well as save and invest money for retiree health costs.
Barnett likes the HSA because he finds it tax-savvy and flexible; money goes in, grows and goes out tax-free for medical bills: He can use the money today if he gets sick or he can save it for tomorrow’s retiree health bills.
“The best way to retire is to not put all eggs into one basket,” said Barnett, who is from Lubbock, Texas. “There aren’t many options where your money can be completely tax-free. An HSA is one of the smartest ways to save for medical expenses.”
Barnett may be somewhat unique in terms of retirement savings habits for his age group because he’s on the younger side of the millennial generation. But more companies are trying to curb health benefit costs by turning tohigh-deductible health care plans. That’s why many people are starting to see health savings accounts, which can be attached to these plans, as another way to save for retirement health care bills.
“I don’t really need the money now, so why not save it?” said Barnett, who named his new company Cleverly Engaged Marketing. “I’m using my 401(k) and my HSA to save for the future and to lower my taxable income.”
Highway to High-Deductible
Just as the retirement savings burden has shifted to employees with 401(k)s from employer-sponsored defined benefit pension plans, health care costs are moving as well. Nearly 17.4 million Americans had a high-deductible health plan with an HSA in 2014, and that number has been growing at a rate of about 15 percent annually since 2011, according to America’s Health Insurance Plans’ Center for Policy and Research.
Money in the accounts has grown as well. As of June 2014, HSAs held $22.8 billion compared with $18.1 billion in June 2013, according to Minneapolis-based health care consulting group Devenir Group.
The transfer of responsibility has happened because employers need to combat health care inflation, said Liz Ryan, head of health benefit services for Wells Fargo & Co.
“Over recent years, we’ve seen major increases in health care expenses,” Ryan said. “Employers have had to make tough decisions on how to provide benefits.”
The shift to high-deductible health care plans has brought about the added bonus HSAs provide in helping users save for future health bills.
“At first people were concerned about what they were losing” with traditional health care plans, said Todd Berkley, president of HSA Consulting Services in Minnetonka, Minnesota. “Now some people are looking at this as a long-term [health care savings] vehicle, which has short-term advantages if you need it.”
HSAs are like 401(k) medical expense accounts for people in high-deductible health care plans. Often when companies offer high-deductible plans, HSAs are paired alongside. For 2015, individuals can contribute up to $3,350, while families can put in $6,650.
Some employers offer 401(k)-like incentives for participants by matching contributions or starting accounts off with seed money. From January to June last year, employers contributed 37.3 percent of all dollars in HSA accounts with the average employer contribution being $1,123, according to Devenir research.
HSA’s Education Gap
Health care is changing quickly, and when workers don’t understand the materials they get explaining their benefits, employers need to change tactics quickly.
Only 30 percent of respondents to an Alegeus Technologies survey had a basic understanding of their health savings account. More than 40 percent of the 1,000 people responding still see HSAs as spending accounts and not long-term savings vehicles.
“As consumers continue to assume greater responsibility for their health care purchase and funding, there is tremendous opportunity to help streamline and simplify the consumer health care experience,” said Steve Auerbach, Alegeus’ CEO, in a written statement.
Liz Ryan, head of health benefit services for Wells Fargo, said the industry needs to do a better job of getting people engaged and understanding the products they are buying.
Alegeus found that most employers offer limited support with 65 percent offering health benefit help during open enrollment only. About 60 percent rely on plan documents and enrollment forms to communicate plan options. Only a third offer interactive support.
Ryan said education is becoming more sophisticated, beyond the traditional enrollment meetings and simple print and email messages. Wells Fargo & Co. is offering aninteractive tool where participants answer a few lifestyle and financial questions and get detailed coaching ideas based on the participants’ responses.
“This allows us to push segmented messages,” Ryan said. “We are seeing the industry evolve. Interactive tools are becoming more important in simplifying the message.”
HSAs carry a triple tax bonus: Money goes in tax-free, gains on investments are not taxed, and funds taken out for many medical costs aren’t taxed either. Defined contribution plans get taxed at some point; regular 401(k)s tax withdrawals at retirement and Roth 401(k)s tax contributionswhile workers are trying to save. They are different from other employee-directed health savings accounts because assets can be invested, employees own their accounts and balances roll over to the next year.
There are a few snags with HSAs overall. First, in order to have an account, workers need to have a qualifying high-deductible health plan. Next, workers covered by other insurance or Medicare or Medicaid are not eligible. Plus, there’s the confusion with the acronyms associated with the various accounts tied to health plans in general.
HSAs have been around for more than a decade, but it has taken a while for employers and their workers to understand them.At first, HSAs were seen as a debit system to pay for health costs.
Today, while it’s hard to determine whether users are saving dollars for retirement, accounts are growing annually.
“People are first understanding the compelling message that we are going to live longer,” said Bob Kaiser, head of health benefit solutions for Bank of America Merrill Lynch. HSAs are a way “to stash away sizable cash today.”
People do need to save, Kaiser said. According to Fidelity Investments, health care will most likely be the largest expense in retirement. Last year, Fidelity reported that a 65-year-old couple who retired in 2014 will need an average $220,000 to cover medical bills in retirement.
Americans had a high-deductible health plan with a health savings account in 2014, up 15% annually since 2011.
Source: America’s Health Insurance Plans’ Center for Policy and Research
“The question is how do people get there?” said Kevin McKechnie, executive director of the HSA Council at the American Bankers Association. “HSA is the only health care plan that allows you to pay for [health care] expenses today and save over time.”
It sounds great, but with a maximum contribution level of $3,350 for individuals and $6,650 for families, it seems difficult to reach the amount Fidelity recommends. But data from the Employee Benefit Research Institute say that while it may be tough, people can save significantly.
A person contributing the maximum allowed to their account for 40 years could save $360,000 using a 2.5 percent rate of return on investments, EBRI data show. Savings could jump to $600,000 if investments earned 5 percent each year and nearly $1.1 million if 7.5 percent could be made. One major catch: HSA participants can’t take any money out for health bills.
“Many individuals may not have the means to both save in an HSA and pay their out-of-pocket health care expenses,” said Paul Fronstin, the director of EBRI’s health research and education program, in the institute’s July report. “Also, HSA balances may not be sufficient to pay all medical expenses in retirement even if maximum contributions are made for 40 years.”
But strides are being made and more money is accumulating and being invested in HSA accounts, said Eric Remjeske, Devenir’s president. Devenir 2014 data show from January to June, participants kept 44 percent of contributions in their accounts, only taking out $8.5 billion of the $15.1 billion contributed.
America’s Health Insurance Plans’ Center for Policy and Research data show that workers who have had an HSA for eight years keep an average balance of $8,453. In many cases, once an account reaches a certain minimum amount (typically $1,000 to $2,000), participants can transfer the rest to investment accounts.
Devenir data show a steady percentage increase of assets in investments, from 7 percent in 2006 to 13 percent in 2014.
“Individuals are looking at how they use these accounts and save to maximize options,” Remjeske said. “It has been an evolution in thinking. It has taken time for people to learn how to use it.”
In 2011, Sunovion Pharmaceuticals Inc. introduced a high-deductible health plan and gave employees a choice between enrolling in it or a traditional health plan. That year, 11 percent of the Marlborough, Massachusetts-based company’s workforce chose the high-deductible plan; in 2014, that number rose to 58 percent.
Last year, the company contributed $900 to individual and $1,800 to family accounts. Overall, participants had a total of $11 million in their HSAs and used $7 million for health bills. Participants who have more than $1,000 in their accounts can move the rest of their money into various stock and bond investments.
“People are now keeping balances. The money from the company is important to them and the power of contributing pretax dollars is huge,” said Karen Rodrigues, Sunovion’s director of benefits and relocation. “Across the board, all age groups are paying attention to this.”
Rodrigues said employees like the control they have over their health care dollars while the company enjoys seeing health care costs run below national norms.
“I hear a lot of people saying, ‘Why should I give my money to premiums that I’ll never use? I’ll keep the money myself,’ ” Rodrigues said. “It has opened up their eyes and they’ve become better consumers.”