Health Savings Accounts: At the Intersection of Health Care and Retirement

For many retirees, health and financial wellness increasingly go hand-in-hand. Funding health care expenses can be challenging in retirement, even with Medicare assistance, and in worst-case scenarios can jeopardize a retiree’s financial security.

An attractive tool for meeting these challenges, says Daniel Bryant, founder and CEO of Sheridan Road Financial, an independent investment consulting and retirement advisory firm, is the health savings account (“HSA”).

Speaking at the 2018 SVIA Spring Seminar, Bryant and Roy Ramthun, president and founder of HSA Consulting Services, explained that HSAs are highly tax-advantaged savings and investment vehicles aimed specifically at helping Americans meet their health care expenses. Qualified contributions to an HSA are tax deductible, just like contributions to a traditional 401(k) plan. But unlike a traditional 401(k), withdrawals from an HSA aren’t taxed, either, as long as they are used for health care expenses. Those expenses can be claimed when they are incurred, at a later date, or never. Any money left in an HSA upon the account holder’s death will pass to the surviving spouse if there is one, or to the account holder’s estate for the benefit of his or her heirs. One caveat: HSAs are available only to individuals covered by a high-deductible health insurance plan.

Introduced 15 years ago with a focus on paying current out-of-pocket health care expenses, HSAs are increasingly being marketed as a long-term savings and investment vehicle that can complement a retirement savings plan. Maximum utility is realized if they’re actually used to pay for health care expenses. Suppose, for example, a retiree is in the 35 percent federal tax bracket and incurs a $4,000 medical bill. To pay that bill from a 401(k), she would have to withdraw $5,400 from her account. To pay it from an HSA, she would only have to withdraw $4,000, for a net savings of $1,400. Ramthun said participants in 401(k) plans, once they’re contributing enough to that plan to take full advantage of any matching employer contributions, might want to consider maxing out contributions to an HSA before topping off their 401(k) contributions.

Individuals who suspect they might not need all the money in their HSA for health care expenses needn’t worry, Ramthun continued. Suppose, for example, a retiree incurs no big medical expenses, or simply wants to use the money in her HSA account for a non-medical expense. As long as she is 65 or older, there is no penalty for doing so; a withdrawal from an HSA for non-medical purposes is simply taxed as ordinary income, just as if it would be if it were coming from a traditional 401(k) account. (If the account holder is under the age of 65, however, she would pay those taxes plus a 20 percent penalty.)

Ramthun noted that many Americans assume Medicare will cover all of their health care expenses after they retire, when in fact it covers only about 60 percent. Individuals are on the hook for Medicare premiums, deductibles, copays, coinsurance, dental and vision expenses, over-the-counter medications, long-term care and supplemental insurance premiums where applicable. A 65-year-old couple retiring this year, he said, could be expected to incur, on average, $280,000 of out-of-pocket health care expenses in retirement.

“You can’t have great healthcare with no financial care,” said Bryant. “Those two worlds are colliding. And the nexus at which they go together is the HSA. The idea that we’re all saving money for retirement to buy that house in Tahoe or Sugar Bush is just not reality for 90-some percent of Americans. They’re saving money for retirement to pay for health care expenses. That’s what employees are thinking about every day.”