HSAs Can Be a Tool for Retirement Planning

As increasing health care costs compete with retirement savings, health savings accounts (HSAs) can be a tool for a holistic health and retirement benefits plan.

“As we focus on improving retirement outcomes, changing health costs and the regulatory environment are causing health and retirement to be more and more linked,” Shelby George, benefits solutions practice leader at Manning & Napier, in Rochester, New York, tells PLANADVISER.

George explains that a holistic health and retirement benefits plan for plan sponsors looks different depending on employers’ goals for their plans. “We’re talking about a consultative approach driven by employers’ objectives for their benefit plans, not a one-size-fits-all turnkey approach,” she says. “The onus is on those of us in the industry to create awareness and tools for approaching benefits in a holistic way.”

Manning & Napier encourages the use of HSAs so participants can save for health care specifically while saving for retirement. “HSAs are not the end-all-be-all, but in Manning & Napier’s opinion, they are an underutilized savings vehicle,” George says. “Employers and employees should be aware of the preferential tax treatment of HSAs.” HSAs allow individuals to pay out-of-pocket qualified medical expenses, and offer triple tax advantages: Contributions go into the account tax-free, earnings accrue tax-free and distributions are tax-free for qualified medical expenses.

The company created a guidebook in recognition that advisers are getting questions about HSAs, and many are not prepared to answer those questions. George says the guidebook arms advisers with a way to talk about HSAs, and it includes actionable items advisers can implement in their practice to facilitate conversations with employers and employees.

A survey by Manning & Napier found 39% of businesses are interested in transitioning to a defined contribution (DC) plan for health benefits as well as retirement benefits. More than half (55%) believe they will make the transition to a plan for both health and retirement benefits in one to three years. Thirty percent of businesses have at least half of their employees enrolled in a health savings account (HSA)-compatible health plan.

There are many models for DC health benefits plans (see “Exploring DC Models in Health Care Benefits”), but they all focus on treating employees as consumers and making employees responsible for decisions, just as they are in DC retirement plans, George points out.  Employers in the survey indicated their top concern in developing an employee benefits strategy is cost (74%), followed by the employer contribution amount (49%).

The majority (79%) of respondents are concerned that employees will cut back retirement contributions due to the rising cost of health care. According to George, there are indications that participants are already reducing retirement plan contributions because of health care costs, as reported by her colleagues. Sixty-one percent of survey respondents agree that DC retirement plan vendors will need to provide an integrated tool to help participants navigate health and wealth planning decisions.

“Looking ahead, undoubtedly the next generation will see health care costs rise to an all-time-high at retirement, exponentially higher than previous generations. Among employers today, HSAs are still very much a widely under-utilized tool. Simply, they often lack adequate participant education that demonstrates the broader financial savings use. Beneficially, HSAs enable participants to begin saving for these costs, now,” George said.

The survey received 404 respondents consisting of U.S. small business owners, business managers and HR professionals (businesses of one to more than 5,000 employees). The survey was distributed between July and August of 2014.