When it comes to saving for retirement, don’t forget about HSAs

This is the second of three articles in a series highlighting insights and research from our latest Voya Perspectives Orange Paper: Amplify the power of HSAs to boost health care savings — now and in retirement. 

• 7 tips for effective HSA program design
• HSAs: 7 elements to include in your education strategy to help spark employee action

Read HSA Paper

Health Savings Accounts (HSAs) can help employees save money for eligible health care expenses, which may be why these accounts have seen a steady increase in popularity year-over-year.¹

HSAs are tax-advantaged accounts that allow employees to save money for eligible health care expenses, but they can also be another avenue for retirement savings as HSAs can be used into retirement, as long as there are funds in the account. Of course, not everyone realizes the full potential that HSAs offer. That’s why it’s important for employers to ensure their employees understand the short and long-term opportunities of their benefit options.

Our latest Voya Perspectives Orange Paper, Amplify the power of HSAs to boost health care savings — now and in retirement, shares how employers can use HSAs to potentially help improve employees’ financial outcomes. In this article, we cover how HSAs can be used into retirement, what employers should do to promote HSA participation and why they’ll want to.

Why HSAs work well for employees

On the surface, HSAs look like simple accounts: employees open the account, put money in and take money out. In reality, HSAs are a lot more nuanced than your everyday savings account.

HSAs are triple tax-advantaged:

• Money going in is pre-tax.
• Money can grow in the account without being taxed.
• Money coming out isn’t taxed (as long as it goes toward qualifying health care expenses).

This allows individuals to save money on taxes today by effectively lowering the taxable income they receive in their paycheck. If the HSA offers interest or investment opportunities, employees can potentially increase their savings over time without paying taxes on that growth. And when it comes time to use those funds, whether it’s tomorrow or in 40 years, employees will not pay tax later when they withdraw (again, provided the funds are used for qualifying health expenses).

This makes HSAs a great tool for savings that can be used in retirement. On top of their contributions to their employer-sponsored retirement accounts, employees can contribute $4,150 (for self-coverage in 2024) into their HSA to save for their eligible health care costs. This offers the opportunity to help reduce the retirement health care savings gap plaguing retirees today. 

 

 

 

 

(Source: EBRI, Projected savings Medicare beneficiaries need for health expenses remained high in 2022, February 2023.)

HSAs vs. Flexible Savings Accounts (FSAs) for use in retirement

Both HSAs and FSAs help employees prepare financially for qualified health-related expenses and can be offered through workplace benefit packages. But when it comes to saving for retirement health care costs, HSAs are a clear winner.

Under federal law, individuals can only carry over 20% of the FSA election maximum each year (projected to be $3,200 in 2024). Because of this, FSAs cannot offer the same long-term savings benefits as HSAs. An FSA does not stay with the employee after their employment ends, and if employees do not use their FSA funds each year, they lose what they contributed.

Employers can still use the unique benefits of FSAs to help encourage their employees’ financial wellness, but when it comes to long-term savings, HSAs can help close the retirement health care savings gap.

Health account solution comparison*	FSA	HSA
Employer and employee can contribute	Yes	Yes
Employee owns the account	No	Yes
A debit card may be available to access	Yes	Yes
Only available with an HSA-compatible HDHP	No	Yes

_{*Depending on plan design}

How HSAs help employers save

Not only do HSAs help employees save money, but they can also help employers (like you) save too.

The required insurance is generally more cost-effective

In order for an employee to contribute to an HSA, they must have medical coverage under a qualified High-Deductible Health Plan (HDHP). HDHPs tend to be more cost-effective for employers than other health insurance plan types.

Save on payroll taxes

Employers’ HSA contributions to their employees’ plans are not subject to the Federal Insurance Contributions Act (FICA) tax or the Federal Unemployment Tax Act (FUTA) payroll tax. It is likely that employers will see savings on their tax bill each year.

Recruitment and retention impacts

Employees want help in deciding how to save and spend their money — their job loyalty depends on it.³ Flexible benefits offerings, like HSAs, may help retain and recruit employees — saving employers money on turnover, hiring and training expenses.

Close the HSA education gap

Despite HSAs being a popular workplace benefit, only about 7% of individuals are actively investing their HSA funds.¹ It’s perfectly acceptable for employees to use HSA funds for today’s eligible health expenses, but there are lots of advantages to saving HSA funds for the long haul.

There are two possible reasons why employees aren’t saving longer:

1. The employee simply cannot afford to save the HSA funds for retirement.
2. The employee does not understand the long-term advantages of their HSA.

In the case of the former, employers should ensure their employees have access to budgeting and financial wellness resources throughout the year. For the latter, a more robust action plan may be helpful.

Create an HSA-focused action plan

Increasing literacy about and participation in HSAs has benefits for both employees and employers. A 2023 Voya Consumer Insights and Research survey found that only 55% of employees understood that HSAs could be used in retirement.⁴ (For more surprising data, read our Voya Perspectives Orange Paper.)

Employers can work to increase HSA participation by dispelling common myths. It may be worthwhile to emphasize these HSA attributes to your employees:

1. HSA balances are not forfeited at the end of the year.
2. HSAs are not tied to employers or employment status.
3. Employees can change their pre-tax payroll deduction amount throughout the year.
4. Payroll deduction is not the only way to contribute to an HSA (although, along with an employer contribution, it is the only way to realize the pre-tax advantage).
5. Employees enrolled in an HSA-qualified HDHP can open an HSA at any time — not just during open enrollment.
6. HSA funds are investable once they reach a designated threshold (depending on the program). As with any investment, there are risks; employees should make sure to fully explore those risks before choosing to invest their balance.

About Voya and our “Orange Papers”

As a workplace benefits and savings provider, Voya knows the dynamics that surround people’s health plans and financial accounts. We aspire to clear the path to financial confidence for more fulfilling lives, so we thoughtfully design our products and services, including our HSAs, to be easy and engaging for employees.

Part of this vision is to better understand how providers, intermediaries and employers can help individuals improve their financial outcomes. Our Voya Perspectives Orange Papers share our research findings and recommendations for industry-wide innovations.

Learn more about Voya’s HSA offerings and read the full Voya Perspectives Orange Paper: Amplify the power of HSAs to boost health care savings — now and in retirement.

Read HSA Paper