Data from 2020 shows that increasing numbers of employers are choosing to make contributions to their employee's health savings accounts (HSAs). That is somewhat surprising, given the profound impact the coronavirus crisis had on business revenues. And yet, there is a very good reason: employers are starting to look at HSAs as a retirement benefit.
Devenir's 2020 Year-End HSA Market Statistics & Trends report shows that HSA growth remained strong in 2020. Total HSA value increased by 25% to $82.2 billion deposited in more than thirty million accounts. That is pretty impressive.
However, things get more interesting when you look at employer contributions. According to the data, 34% of all HSAs were receiving employer contributions at the start of 2021. Moreover, as much as 60% of all the contributions now being added to HSAs are coming from employers.
- Highly Tax-Advantaged
HSAs are appreciated mainly because they are highly tax-advantaged. Contributions are made with pretax dollars so, right off the bat, contributing to an HSA reduces a person's total taxable income. But it gets better. As long as account funds are used to pay for qualified medical expenses, they are not subject to income tax.
The one caveat with the HSA is that it is only available to employees on high deductible health plans. As the thinking goes, HSAs give such employees a better way to manage healthcare spending in light of the deductibles their health plans require of them.
As for employer contributions, there is something to be said about HSAs as a retirement vehicle. The key to this is the fact that money in an HSA can be rolled over from one year to the next. It doesn't have to be spent in the same year it is deposited.
- Accumulating Healthcare Funds
Imagine you are a younger employee with a high deductible health plan and an HSA. Being young, your healthcare expenses are limited. You spend very little of the money you contribute to your HSA. Now, imagine this continuing year after year. Because you can roll the funds over, the value of your account continues to grow.
Assuming your salary allows you to comfortably absorb your health plan's deductibles, you might be able to leave most of your HSA money alone. By the time you are ready to retire, you could have quite a bit stashed away. You could do a couple things at that point.
First, you could withdraw the money and use it for other things. It would be subject to income tax, but at a reduced rate. Alternatively, you could forgo supplementing Medicare with additional coverage and use your HSA funds instead. Any money you would have spent on supplemental insurance goes back into your budget for other things.
- More Competitive Benefits
As a health benefit broker, we hope you understand the implications of all this. Talking about the retirement benefit aspect gives you yet another way to encourage clients to consider HSAs. The HSA represents an additional benefit your clients can offer as they compete for the top talent in their industries.
Combine an HSA with a high quality 401(k) plan and you have something better to offer. And in cases where job seekers might otherwise be averse to your high deductible health plan, the HSA could make up for it. Either way you look at it, the HSA is something worth investigating as an added employee benefit.
More and more employers are doing just that. They understand the implications of HSAs as retirement vehicles, and that is motivating them to increase the contributions they make to employee accounts.