Why do people underutilize health savings accounts — and what as advisors can we do about it?
Saving for greens fees and booking travel to visit the grandkids may not be easy, but spending those dollars can at least bring a smile to your face. Saving and investing for health care costs in retirement is neither easy to do nor enjoyable to think about.
In a recent NPR story, the idea that “people are predictably irrational” was brought to bear on how we as a nation are not saving for retirement, and in particular are not saving for health care expenses in our golden years. Health savings accounts have risen to prominence in this regard as a tax-advantaged way to store up a health care nest egg for retirement.
HSAs were introduced as a feature of the high-deductible health programs (HDHPs) that many employers are starting to incorporate into their health plans to reduce overall costs. By offering much cheaper but less extensive health care coverage, the thinking goes, employees will be more engaged in finding the right medical services at the lowest price.
HSAs help employees manage those costs, but they also carry with them other long-term advantages distinct from their use in HDHPs. First, unlike the common flexible spending account (FSA), HSA funds roll over and accumulate from year to year if they are not spent. Second, unlike most company-sponsored heath arrangements, HSAs are owned by the individual, and can be carried with them from employer to employer, or on into retirement.
HSAs Are Triple Tax-Free
What makes an HSA unlike any other health saving vehicle, however, are its tax advantages. HSAs offer three distinct ways to grow your investment tax-free:
- HSA contributions are pre-tax, so you will be taxed as if you make less money than you do.
- Neither the principal nor earnings in the HSA are subject to taxation, so the entire amount invested grows tax-free.
- The money is not taxed when it’s withdrawn, so it can go entirely toward paying qualified medical expenses.
So why have those who qualify been so hesitant to invest in their health through their paycheck?
There could be two very good reasons. First, behavioral finance teaches us that people do not plan for an outcome that is far off in the future, especially one as unpleasant to think about as getting old, getting sick and spending a good deal of money to get the proper care.
‘Stow it and Grow it,’ Not ‘Use it or Lose it’
Secondly, a general lack of education at both the employee and employer level also continues to hamper HSA utilization as a financial planning tool. And too many people who participate in an HSA are under the impression that the account has the FSA “use it or lose it” feature, mistakenly thinking that the funds in the account must be used by the end of the year. Simply breaking through and explaining that the HSA can be used to “stow it and grow it” – where the account balance rolls over each year and can be invested as the account matures – could do wonders to persuade those in a position to take advantage.
Good financial advisers and consultants are uniquely qualified to help clients (both corporate and individual) understand and prepare for this unique investment opportunity. HSAs may in fact be the next megatrend for financial advisers, asset managers and recordkeepers to expand their suite of services. It’s hard not to embrace, after all, an investment vehicle with triple tax-free capabilities, a multitude of investment opportunities, and a direct tie to the employer benefits package.
Let’s be honest: No one likes to correlate their golden years with prescription drugs, doctor visits and means-tested Medicare premiums. But show me a retirement without them and I will stop beating the HSA drum.
Ryan Tiernan, AIF®, CIMA®
American Funds From Capital Group
Securities offered through American Funds Distributors, Inc.
Be sure to check out Workshop 7: HSA “Match” — The “Other” Retirement Savings Account, at the NAPA 401(k) Summit. Register at http://napasummit.org.