As a society, we’re often in denial about retirement. While most of us envision a future full of leisurely, work-free days, many people have done little to prepare for it. Daily Starbucks runs and racing out to buy the latest iPhone have become second nature; retirement planning has taken a back seat to today’s must-have indulgences.
Life is expensive, and the reality is that most of our daily expenses aren’t going anywhere in retirement. In fact, some of our out-of-pocket costs, namely health care, can go up. According to research by Fidelity Investments, the average couple who retired in 2015 will need $245,000 to cover health care throughout their retirement — up from $220,000 in 2014.
The Fidelity report went on to say that nearly 75 percent of those surveyed were most concerned about being able to afford unexpected health care costs in retirement, yet only 22 percent had actually factored those costs into financial planning. The good news is that it’s never too late to start, and offering a health savings account, or HSA, can be a great way to help employees get on the right track to a healthy financial future.
This article is online bonus content for Workforce’s upcoming July feature on retirement benefits.
Breaking Down the HSA and the FSA
HSAs have traditionally been thought of as spending accounts — often confused with flexible spending accounts, or FSAs — and a way to use pretax dollars to cover everyday health care costs. While that is true, that is only one advantage of an HSA. Designed to be paired with a high-deductible health plan, or HDHP, HSAs allow employees to set aside pretax dollars to cover their deductible, copayments and/or other expenses not covered by insurance.
But HSAs are more than just spending accounts. Here’s where they stand apart: There is no requirement for your employees to use the money they contribute in the current year — or even within the next five years. With no “use it or lose it” policy, the HSA stays with your employees wherever they go, even if they change jobs or health care plans. As long as they have an HSA-qualified health plan and no other impermissible coverage, they can continue to build savings that they can access as needed today, tomorrow and in retirement.
Thinking Beyond the 401(k)
Maybe you’re thinking, “That sounds like a 401(k), and we already offer those.” That’s terrific, and by all means, keep encouraging your employees to contribute to those plans, especially if your company matches contributions. However, with health care costs poised to eat into a big chunk of your employees’ retirement savings, it makes sense to also offer and encourage enrollment in an HSA to help them cover those expenses and protect their retirement income.
For example, in 2016, an employee with family coverage in an HSA-qualified health plan can contribute up to $6,750 to an HSA. Health care expenses are likely to arise during the year, and copayments or big-ticket items may fluctuate based on needs, like braces or new glasses, and the pretax dollars in an HSA can cover that. Because they are pretax, your employees’ money is going to go much further and can save workers an average of 30 percent on health care expenses. Any leftover funds at the end of the year stays in the HSA, accruing interest and growing year over year.
Taking Advantage of Triple Tax
HSA funds also have three distinct tax advantages:
- The money that your employees contribute to their HSA goes in tax-free.
- Their HSA balance accrues interest and grows tax-free.
- Unlike a 401(k), when your employees are ready to use the money, the funds can be withdrawn tax-free as long as they are used for eligible health care expenses.
Similar to a 401(k), your employees also have the option of investing all or a portion of their HSA funds once they reach a minimum account balance. This can help increase their health care nest egg even more. The amount your employees are able to contribute is obviously dictated by their disposable income, but contributing as much as possible is ideal, given the triple tax advantage.
The neat part about socking away money is that, as your employees’ HSA balances start to grow and they better understand the financial power that comes with tax-free savings, the more they’ll likely want to be active participants, seeking opportunities to maximize their savings. If you support your HSA offering with targeted communications and educational resources, you can help empower your employees to take full advantage of their retirement and health care savings.
No matter their age, income or current retirement savings, an HSA can be a great savings option for your employees. Your employees’ physical and financial health is too important not to investigate the advantages of including an HSA in your benefits package. Acting now will help your employees better protect themselves and their families today and in the future.