When it comes to open enrollment periods, employees typically focus their attention on evaluating insurance providers and considering which health plan is right for them and their family. Because health care costs have risen so much over the last decade, the most critical factor in making that decision tends to center on out-of-pocket costs and the level of coverage provided in each plan. However, employees should also keep in mind the significance of an oft-overlooked benefit: the health savings account (HSA).
An HSA is a savings account that can be used to cover medical expenses this year or in the future, e.g., retirement. In order to contribute to an HSA, they must be enrolled in a high-deductible health plan (HDHP). And chances are their company is already offering one or more of these options.
An HDHP is a health insurance plan with lower monthly insurance premiums and higher deductibles than the traditional health plan. Although seeing “higher” anything when it comes to insurance — unless it’s higher coverage — can make anyone skeptical, there is indeed a silver lining here for employers and employees alike.
Among the 2,500 companies surveyed by benefits consultant Mercer in 2015, 59 percent said that they offer an HDHP, up from 48 percent in 2014. By 2018, it is projected that three-quarters of companies will offer HDHPs. According to the Kaiser Family Foundation, four percent of employees in 2006 were enrolled in employer-sponsored high-deductible plans; however, that number shot up to a quarter of employees in 2015. In addition, nearly 50 percent of millennials are jumping on the bandwagon, opting for lower-cost health plans with deductibles. Despite some initial negative perceptions of high deductible plans, when paired with an HSA, these plans offer employees arguably the most valuable benefit for health care (and retirement) savings. The reduced premiums, flexibility, and long-term savings benefits are definitely an upside to HDHPs.
For employers, HDHPs translate to real savings. Last year’s Mercer National Survey of Employer-Sponsored Health Plans showed that the medical cost per employee enrolled in a HDHP associated with an HSA averages $9,228, compared to $11,248 for HMOs and $11,212 for PPOs. That equals a substantial savings of about 18 percent. Importantly, if the employee sets aside $2,000 into an HSA, they are prepared for the potential of needing to cover deductible out-of-pocket costs. And, if they are healthy and don’t need this money for health care right away, these savings will accumulate for future health care costs.
From an employee perspective, choosing an HDHP with an HSA typically delivers the lowest-cost option in terms of paycheck deduction, an incentive to manage health care costs, and the opportunity to save money for future health care expenses.
HSAs offer a triple tax advantage: Contributions to HSAs aren’t taxed — which means contributing lowers an employee’s taxable income — the balance grows tax-free, and the funds are available tax-free to pay health costs. While more popular retirement savings vehicles — 401(k)s, individual retirement accounts (IRAs), and Roth IRAs — can be used to fund health care expenses, HSAs offer the additional tax advantage of allowing the employee to withdraw this money any time between now and retirement, should they need it to pay for health care. And unlike flexible spending accounts (FSAs), HSAs are portable, meaning they go with the employee to new employers, and they remain a universal benefit even for those who have left the job market for good. There’s no timeline for spending HSA funds, and they carry over year to year. And if money from an HSA isn’t needed for medical expenses, it can grow tax-deferred.
In 2015, an estimated 16.7 million HSAs were open. By 2019, it is projected that the number of HSA account holders will increase to 30 million. The growth is encouraging; however, confusion on the full benefits of HSAs still persists among employees. According to a 2016 study by HealthSavings Administrators and HSA Coach, a quarter of millennials (two times the percentage of those from other generations) were unaware that their HSA funds could be invested. And according to Bank of America Merrill Lynch’s Workplace Benefits Report, 8 in 10 employers stated that their employees look at their HSA not as long-term savings, but near-term spending accounts.
In that light, employers cannot underestimate the value of laying out a basic description of how it works and how it benefits them. This means generating interest, engagement, and action leading up to the open enrollment period. For example, savvy employers offer information in multiple formats: FAQs, in-person presentations, and Q&A sessions, as well as videos, webinars, and other online tools.
Open enrollment or not, now is the time to help all employees better understand HSAs. Virtually all employers want their employees to thrive, but while many companies stress the importance of a 401(k), most merely mention the HSA in passing. All retirement options should be taken seriously, or else employees will find out too late the significant difference between the two. An HSA allows the same tax benefits that a 401(k) does, but a 401(k) does not allow disbursements until retirement. As such, HSA account holders won’t have to wait for retirement and can use funds for both current and future medical expenses.
The long and short of it is this: Save those 401(k) dollars for trips to see the grandkids. Save your HSA dollars for those medical expenses to be incurred during retirement. If you are lucky enough to not need these funds in retirement, you can have the same tax advantages as with your 401(k).
More serious consideration of an HSA by employees during open enrollment will help them to take full advantage of the cost savings, prepare for future health care expenses, and build a retirement nest egg. The HSA is an unsung hero when it comes to money management up to and during retirement, and just like our health, we shouldn’t take for it granted. Rather, we should take full advantage of its many benefits.