How to Maximize HSA Value for Retirees

Danielle Andrus

4 years ago

Most of the healthcare costs that a retiree will encounter can be paid for tax-free with a health savings account, according to a paper by Willis Towers Watson, including premiums for Medicare Parts B and D, Medicare Advantage, and long-term care insurance. Premiums for Medicare Supplement plans or individual dental and vision plans can be paid for after paying taxes on the withdrawals, but the paper notes that even these taxes can be avoided “if the HSA owner has previously unreimbursed eligible health expenses that can be ‘cashed in’ tax-free in retirement.”

“Employers play an essential role in their employees’ financial well-being, and that includes helping them plan for the cost of healthcare in retirement,” David Speier, Managing Director of Benefits Accounts at Willis Towers Watson, said in a statement. “Healthcare is most retirees’ largest expense, and with more of the cost shifting to employees, employers are striving to help them make informed decisions about their options and create an appropriate savings plan.”

Willis Towers Watson found that employees who start saving “early can accumulate enough resources to cover healthcare expenses in retirement assuming normal retirement at age 65,” according to the paper. “However, given the need to be in an HSA-compliant plan, few employees will likely spend over 25 years contributing to an HSA.”

The requirement that account holders be covered by a high-deductible health plan is a significant obstacle for some investors and explains why only a small portion of individuals use an HSA even though most employers offer one, according to the paper.

Then, if investors decide to avail themselves of a high deductible health plan, they have to go about setting up the HSA and making contributions. Automatic features that have become common among 401(k) plans are often unavailable in HSAs due to regulatory and administrative concerns, according to the paper.

HSAs’ tax benefits are powerful tools to help increase retirees’ assets, but account holders who use their HSA as a checking account to cover current healthcare expenses are, of course, depleting those assets. Willis Towers Watson suggests that account holders with current healthcare expenditures consider using personal savings or other tools to allow their HSA to grow unencumbered. For example, a limited purpose HSA can be used to cover dental and vision costs.

“Healthcare spending and retirement savings is an ongoing and long-term challenge that an HSA can help address as a part of a broader retirement savings plan,” said Speier. “It’s particularly important for employees today to reassess their financial wellness plan and become familiar with HSAs as a tax-efficient way of saving specifically for healthcare in retirement.”