Well-Funded HSAs Are a Retirement ‘Superpower’

Having an HSA going into retirement is ‘incredibly powerful,’ experts say, because money is being saved and spent as efficiently as possible.

By DJ Shaw

Retirement plan advisers and their clients are warming to the idea that health savings accounts (HSAs) can be beneficial as both long- and short-term savings vehicles—but there are still many misconceptions about HSAs.

Scott Riordan, Sentinel Benefits & Financial Group health and welfare vice president, says HSAs are a powerful and important way to save and pay for health care costs because they are both “triple tax-free” and flexible, meaning the account is usable from the moment it is opened and throughout retirement.

Contributions are deducted from an individual on a pre-tax basis, and employers save money by not having to pay payroll taxes, Riordan says. HSA funds can also be invested in mutual funds, index funds or brokerage accounts that can help them grow with earned interest. The third advantage is that withdrawals for qualified expenses are also tax-free.

Michaela F. Scott, Borislow Insurance retirement plan consulting director, adds that the money that’s contributed to HSAs rolls over after each year. That money can include contributions from the employee, employer and the employee’s family since anyone can fund an HSA. She compared it to having a “bucket of money” that you’ll never have to pay taxes on and that will cover expenses including health care premiums and dental visits.

Having an HSA going into retirement is “incredibly powerful” because money is being saved as efficiently as possible, Scott says. The best way to take advantage of the account is to put money in it and to not touch it as the balance continues to grow—even if that means paying for medical expenses out of pocket in the meantime. In the future, those expenses can be reimbursed based on saved medical care receipts, she explained.

It’s important to understand how HSAs work when communicating about the benefit to employees. Some employers are confused about the accounts and lack an effective strategy, says Heather Tredup, partner and retirement best practices leader at Aon. Because of that, there are often misconceptions.

One misconception is anyone can enroll in an HSA, but that isn’t true, Tredup says. In order to take advantage of a health savings account, employees need to first be enrolled in a high-deductible health plan (HDHP). Employers need to start their education with HDHPs, so the benefits of an HSA make sense to employees, she suggested.

Another misconception is the funds will automatically be invested, says Greg Puig, vice president, benefit consulting services at Sentinel Benefits & Financial Group. Administrators will usually require accounts to meet a minimum balance and employees to make a request before funds can be invested.

In addition, Puig noted, employees should understand the accounts are individually owned, so they will have the HSA even if they leave their employer.