Posted: November 02, 2012
HSAs build long-term wealth with tax-favored savings
That "S" doesn't stand for "spending"Dennis Triplett
Most people don’t realize that health savings accounts (HSAs) are one of the best long-term savings vehicles in the market today. Paired with high-deductible health plans, HSAs are available to help pay for current qualified medical expenses as well as to save for future expenses, all in a tax-exempt account.
Many consumers continue to use their HSA the same way they use their flexible spending account (FSA) – using available funds for current expenses. While that is an option with HSAs, it is not a requirement as the “use or lose it” rule doesn’t apply with these accounts, and deposited funds are able to grow year-over-year, unlike FSAs. It is easy to understand where the confusion comes from as HSAs are still new to many consumers and are often overlooked in benefits education and communications.
We believe there’s a great need for employers to educate themselves – and employees – about all that HSAs can offer beyond paying for the current year’s medical expenses. HSAs can serve as a powerful tool for long-term savings and as a key part of an overall retirement strategy to build wealth for both medical and other general retirement expenses, including tax-free Medicare premiums.
Building wealth in an HSA
Even though HSAs are designed to pay current and future medical costs, only a handful of people fully grasp the opportunity to provide for future needs.
Our recent study of 175,000 HSA holders showed an average deposit balance of just $1,800. Most people either used HSAs as a pass-through for each year’s medical expenses or did nothing at all with them. The average contribution was $1,016 per year.
At that rate, most people are short-changing their futures. The IRS allows a maximum HSA contribution of $3,100 for individuals or $6,250 for family coverage in 2012 (plus a catch-up amount of $1,000 more for people over 55 years old). Those figures will rise modestly in 2013.
Less than 1 percent of the HSA holders we studied “maxed out” their allowable contributions.
Of course, an earlier start adds more to savings, and delays limit the amount of the nest egg. And long-term returns vary. The point is, every employee faces the prospect of large medical costs in the future – and every employee, to prepare for those needs, should start saving now.
Gaining triple tax advantages
Employees should always first take advantage of any offered match for their HSA or 401k. After that, it can be a confusing task selecting where to invest remaining funds with the many types of accounts available. While many further invest in their 401k or IRAs, their HSA is actually a better option in terms of flexibility, tax advantages and long-term growth potential.
Taxes are an important consideration in long-term investing because of the compounding of savings. HSAs have the potential to offer triple tax advantages for individuals – something not seen in other retirement accounts. Only an HSA offers tax benefits at deposit, during the account’s life and upon withdrawal. So a person saving for future medical needs can avoid taxes at all three stages in this life cycle.
Investing for long-term growth
Major HSA providers now offer multiple investment options, including money market funds, self-directed accounts for mutual funds or individual stocks, and FDIC-insured accounts for cash needs. Yet only around 1 percent of the HSA holders we studied used the available investment options.
Employers should find an HSA plan that encourages long-term savings, including:
Robust investment options
Proactive educational approach
Integration with other benefits
Today, most act as if the “S” in HSA stands for spending rather than savings. We have the opportunity to educate employees about the benefits of saving with an HSA, including preparing for future health care expenses during retirement or later in life.
Dennis Triplett is CEO of UMB Healthcare Services, one of the country’s top providers of HSAs, FSAs and HRAs. He is also chairman of the board of the Employers Council on Flexible Compensation (ECFC) and Chairman of the HSA Leadership Council of America’s Health Insurance Plan (AHIP). Dennis may be contacted via email at Dennis.Triplett@umb.com or by phone at (816) 860-8230.