Most people don’t realize health savings accounts 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 HSAs the same way they use their flexible spending accounts, using available funds for current expenses. While that is an option with HSAs, it is not a requirement as the “use it 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.
I believe there’s a great need for employers to educate themselves – and employees – about all 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 wealthEven 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.
Based on a UMB bank study May 2010–11, 175,000 UMB HSA shareholders 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 Internal Revenue Service allows a maximum HSA contribution of $3,100 for individuals and $6,250 for family coverage in 2012, plus a catch-up amount of $1,000 more for people 55 and older. Those figures will rise modestly in 2013. Less than 1 percent of the HSA holders UMB studied “maxed out” their allowable contributions.
Of course, an earlier start adds more to savings, 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.
Triple tax advantagesEmployees should always first take advantage of any offered match for their HSA or 401(k). 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 401(k) or individual retirement accounts, 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 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.
Saving, not spendingMajor HSA providers now offer multiple investment options, including money market funds, self-directed accounts for mutual funds or individual stocks, and Federal Deposit Insurance Corp.-insured accounts for cash needs. Yet only about 1 percent of the HSA holders UMB studied used the available investment options.
Employers should find an HSA plan that encourages long-term savings, including robust investment options, a proactive educational approach and 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 Kansas City-based UMB Healthcare Services, a division of UMB Financial Corp. He may be reached at dennis.triplett@umb.com.[[In-content Ad]]
