A tale of two HSAs

Health savings accounts are a tax-advantaged tool to help with healthcare expenses. But what most employees don’t realize is that they can also be a valuable tool to help employees save money and plan for retirement.

As a retirement tool, HSAs tend to be underutilized. According to one study of more than 2,155 full-time employees, only 8% of people who had an HSA used them as a savings tool.

As a benefits administrator, we’ve heard a lot of reasons why someone wouldn’t use their HSA for long-term savings. In some cases, using an HSA for medical costs becomes a necessity. But often times, employees think they have to save a lot or have disposable income to capitalize on their HSA for retirement savings. But this simply isn’t true.

Meet Joe and Jill — two very different savers who both reaped big benefits from their HSA. Let’s explore a bit more about how these employees are choosing to use their healthcare dollars.

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Meet Joe: A conservative saver, mired in student loan debt

At 25 years old and just three years out of college, Joe’s what you might consider a typical millennial. His top priority is tackling his significant student loan debt. Because of this debt, he put buying a house on hold and wants to be more financially stable before starting a family. Joe needs affordable healthcare today, and intends to use some of his HSA for medical costs that arise.

Joe’s HSA strategy

Since Joe has to focus on his student loan payments, he knows that he’ll need to use some of his HSA funds toward healthcare costs. Starting at age 25, Joe contributes $3,000 a year to his HSA and allocates $1,500 dollars per year for medical expenses. These medical expenses include medical copayments at his doctor’s office, prescriptions, dental and vision care, and more. Over the years, Joe becomes comfortable investing his HSA dollars. He reinvests all of his earnings, and earns 8 to 10% annual interest and investments until he retires at age 65.

See also: IRS increases 2020 HSA limits

Meet Jill: An aggressive saver, with family and travel on her mind

Jill has ambitious career goals and big plans when it comes to long-term savings. At age 25, she’s a full-time employee who’s committed to a disciplined savings strategy and wants to put away as much money as possible. Her ultimate goal is to have plenty of money to afford care in retirement, and fulfill her love for travel and family.

Jill’s HSA strategy

Jill kicks off her HSA at age 25 by contributing the max amount each year. Along the way, Jill gets married and has children, boosting her HSA contributions up to the family limits. That means the HSA can be used to cover medical costs for both her spouse and her children, if she chooses to use it as such. Instead of using her HSA for medical costs, Jill decides to use out-of-pocket funds and hold on to receipts for any future HSA reimbursements. Jill starts to reinvest her earnings as soon as possible, earning 8 to 10% on annual interest and investments. When she turns 55, Jill further leverages the $1,000 catch-up contribution limit.

The outcomes

When Joe retires at age 65, he ends up with a $246,000 nest egg. Jill ends up with $870,000. These funds can now be used for non-health related expenses. Think retirement, travel, buying a new car or funding a hobby. If needed, they can be used for medical costs, too. These funds will be subject to normal income taxes, but even so, this nest egg will help their retirement funds go even further.

Employers can also reap benefits from making HSAs available to employees. Here are a few.

Simple administration. Once an HSA account is set up for employees, these accounts are easy to maintain and require very little administration on the employer side.

FICA tax savings. Employees are able to contribute to their HSA before taxes, allowing them to reduce their taxable income. But employers benefit here too: The IRS doesn’t consider that pre-tax money as wages, meaning both the employee and the employer don’t have to pay FICA wages on those contributions — which includes Social Security and Medicare tax.

Save on health insurance premiums. When you move to a high-deductible health plan and HSA from a traditional insurance plan, you’ll save on insurance premiums, but can still maintain quality coverage for employees.

Build a better benefits package. HSAs are an excellent investment tool, and when offered in conjunction with another retirement plan, such as a 401(k), your employees will have access to several options to help them save for their future.

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