HSA Participation for Retirement Savings

HSA: The Best Retirement Plan for Your Employees?

When it comes to helping your employees save for retirement, health savings accounts (HSAs) could be just as valuable, if not more so, than 401(k)s.

A serious need to save

With the average monthly Social Security benefit a mere $1,335 (roughly $16,000/year),1 and traditional pensions continuing to disappear, employees have a serious need to save now in order to provide for their retirement. The 401(k) plan is a well-established vehicle through which workers can consistently sock money away—at a tax advantage and often with the help of matching contributions from the employer. The trick has been getting employees to participate. Remarkably, less than 70 percent of employees who have access to a 401(k) actually contribute, and those that do contribute rarely put away more than the typical default amount of six percent of their paycheck.2

This underutilization is no doubt concerning, and has rightfully prompted many employers to overhaul their communication efforts around 401(k)s to encourage greater employee contributions. But, considering recent developments in employer-sponsored health care, there might actually be a better place for employees to put their next dollars in preparation for retirement.

100 percent tax-free money

As companies try to cut down on their health care spending, more and more are adding high-deductible health plans (HDHPs) to their benefits mix. And because these plans require employees to pay more out of pocket for their medical expenses, many are paired with a health savings account (HSA) to help employees manage the added financial burden. While HSAs can be an effective way to fund an annual deductible, the unique tax advantages of these accounts can make them a powerful vehicle for retirement savings.

Used properly, HSAs are completely shielded from taxation. Contributions aren’t taxed when they go in, interest accumulates untaxed, and account owners can make tax-free withdrawals for qualified medical expenses. Funds in a traditional 401(k), on the other hand, are taxed as income when they’re taken out during retirement. While 401(k)s offer greater flexibility in how account holders can spend money in retirement, HSAs are unique in that they allow account holders to keep—and use—100 percent of their money, and they should not be overlooked as a long-term savings option for employees.

Granted, HSAs come with a caveat. Any funds used for unqualified, non-medical-related expenses are hit with a 20 percent penalty and incur regular income taxes. But it stands to reason that health care is more of an expense in retirement than at any other time in a person’s life. Medicare doesn’t cover everything, and reports estimate that the average couple spends nearly $400,000 on health care in retirement.3 The chances are that retirees will always have qualifying medical expenses for which they can use their HSA money (including Medicare premiums). Your employees have much to gain from maxing out these accounts every year and letting them grow.

Untapped potential

However, as with 401(k)s, employee participation in HSAs is disturbingly low. A recent analysis of benefit enrollments revealed that HDHP participants eligible for an HSA contributed only about 42 percent of the maximum amount allowed for 2016.4 Accounts were especially underutilized by millennials, who put away less than a quarter of the contribution limit. Employees are leaving thousands of tax-free dollars on the table—dollars they most likely will require in retirement. 

You can think of an HSA as essentially a more specialized 401(k)—smaller in scale, bigger in terms of tax benefits—that can play just as vital a role in the future well-being of your employees. But only if employees take advantage of them. That’s why an engaging communication strategy is so important. If you’re not actively promoting HSAs and stressing their potential value, your employees are much less likely to contribute to these accounts. And, much like poor 401(k) participation, underutilization of HSA’s can place undue financial risk on your employees in the long run.

Learn more about the significant opportunity employers have to help employees improve their ability to pay for health care now and in retirement. Download your free copy of Benefitfocus’ inaugural State of Employee Benefits report, which looks at over 700,000 actual open enrollment elections to provide key insights for the 2016 benefit plan year.


1Social Security Administration

2 Bureau of Labor Statistics

3 HealthView: 2015 Retirement Health Care Costs Data Report

4 Benefitfocus: The State of Employee Benefits 2016, Large Employer Edition