Company-sponsored pension plans of yesteryear caused employees to be apathetic about where retirement dollars came from and how they were invested but ultimately led to today’s proliferation of 401(k)s. In much the same way, company-sponsored health plans have followed the same path and have led us to see greater adoption of health savings accounts (HSAs). However, out of the $371 billion spent on out-of-pocket healthcare expenses in 2018, just 22% flowed through these triple tax-advantaged accounts. The result: consumers left $85 billion in tax savings on the table.
Why? According to the 2018 Alegeus Consumer Health & Financial Fluency Report, 42 percent of consumers can’t pass a basic true/false quiz on financial fluency and more than a third (33%) don’t understand basic financial terms like fees, interest, or investments.
This low level of consumer fluency helps explain why so few consumers open and contribute to HSAs today. They lack confidence in their ability to:
- Build a financial plan (48%)
- Articulate questions & discuss financial issues (41%)
- Evaluate & make decisions about investments (55%)
This is where financial advisors can really guide consumers to make sensible decisions about investments, tax, and insurance. HSAs have become an outstanding tool for investment and retirement planning, even outperforming 401(k)s in some respects.
Back to the Basics
An HSA is a tax-advantaged saving and spending account for eligible out-of-pocket healthcare expenses. To be eligible to open and contribute to an HSA, a consumer must be enrolled in a qualified High-Deductible Health Plan (HDHP). HSAs are designed to be used for both immediate out-of-pocket healthcare expenses and as longer-term savings vehicles. They are a sound addition to any personal financial strategy. Here are the top five reasons why financial advisors should recommend HSAs to their clients:
Reason 1: HSAs Are the Most Favored Account Under the Current Tax Code
HSAs offer a triple-tax advantage that is unmatched in the market:
- HSA contributions are tax deductible, so they reduce federal income taxes owed, and contributions made by employers are excluded from the employee’s gross income
- HSA assets typically grow tax-free, at least at the federal level
- HSA funds can be spent tax free on eligible healthcare expenses (including some that aren’t usually covered by insurance or Medicare) for the account holder, their spouse, and any qualified dependents
Reason 2: HSAs Are Portable
Unlike employer-owned Health Reimbursement Arrangements (HRAs), the HSA (and all of the funds within) is owned exclusively by the consumer – even when contributions were made by the employer. If an account holder opts out of their HDHP, they still retain the account and can continue to use existing funds tax free for qualified medical expenses. Consumers are never required to close or roll-over their HSA dollars upon changing jobs.
Reason 3: HSA Funds Don’t Expire
It’s a popular myth that unused HSA funds expire at the end of each year. Hopefully, at this point, it’s clear that this is not the case. There is no use-it-or-lose-it provision for HSAs; account dollars accumulate over time.
Reason 4: HSA Funds Can Be Invested
Once an HSA reaches a minimum balance (typically $1,000), the account holder can choose to open an HSA investment account and allocate dollars to available mutual funds. As HSAs have gained in popularity, we have seen investment options become more robust as to mimic the availability of 401(k) investment options and fees. This makes HSAs an excellent vehicle for medium to long-term saving for healthcare expenses.
Reason 5: HSAs Are Outstanding for Retirement Planning
The cost of healthcare for retirees can be significant. A healthy 65-year-old couple can expect to spend around $280,000 to cover their healthcare needs during retirement. HSAs are a highly-flexible tool and were designed with retirement planning in mind. After age 55, HSA owners can make an additional $1,000 annual contribution to help them prepare for future out-of-pocket healthcare expenses. HSA funds are available tax free for qualified healthcare expenses at any time, but they can still be accessed for other expenses as needed.
- Before age 65, unqualified expenses are subject to a 20% penalty and income tax.
- After age 65, HSA owners can use the funds for non-eligible healthcare expenses without penalty, but they will be subject to income tax.
A smart retirement savings strategy is to pay out-of-pocket expenses with discretionary income and save the receipts. As long as the qualified medical expense was incurred after the HSA was established, it can be submitted for reimbursement at any age or time in the future.
The Future of Smart Saving
HSAs are a powerful addition to any personal financial strategy, and financial advisors play a vital role in helping consumers understand the opportunity they present. Fortunately, modern technology is also starting to play a role in helping consumers make smart decisions about healthcare saving and spending. Through the use of artificial intelligence and machine learning, HSA providers will soon offer an HSA experience that guides consumer behaviors with personalized spending, saving, and investment recommendations based on their specific health and wealth needs. For financial advisors, guiding consumers towards HSAs – and the enhanced user experience and benefits they provide – will be a clear path to differentiation and improved client satisfaction in the years ahead.