Employers tout HSAs for retirement savings, a pitch advisers already make to clients

The triple tax benefits of health savings accounts can boost a nest egg while offering a way to cover medical expenses tax-free.

Companies are promoting the retirement savings benefits of health savings accounts, a pitch that’s backed up by investment advisers.

In a recent survey, the Plan Sponsor Council of America found that half of large employers — those with 5,000 or more employees — position an HSA as part of a retirement savings strategy. Advisers couldn’t agree more when it comes to certain clients.

“It is an awesome savings strategy, especially for people who don’t have a high medical need,” said Marianne Nolte, owner of Imagine Financial Services. “Letting the account grow for retirement is pretty sweet. There’s some great tax benefits to it.”

An investor can make tax-deductible contributions to an HSA. The funds in the account can grow tax-free and can be withdrawn without penalty for qualified medical expenses.

If money is taken out for nonmedical reasons before age 65, it’s subject to income tax and a 20% penalty. But the same withdrawal after age 65 only gets hit with income tax — just like a withdrawal from a traditional individual retirement account.

An HSA must be combined with a high-deductible health care plan. Chris Chen, an adviser with Insight Financial Strategists, recently helped clients compare a standard health plan with a high-deductible one. The high-deductible plan combined with an HSA worked well for them because of the tax advantages and the fact that they have predictable health care expenses at this point in their lives.

“It’s clear that the characteristics of the HSA lend themselves to being an investment account,” Chen wrote in an email. “Employers are catching up with the advising industry.”

In 2022, an individual can contribute up to $3,650 to an HSA and families can contribute up to $7,300 and get the tax deduction.

Ryan Brueck, lead adviser at ClearWealth, encourages clients who are able to do so to pay medical expenses out of pocket as much as they can and maximize the tax benefit by accumulating their savings in an HSA to use for medical bills later in life.

“I’m a huge fan of utilizing HSAs, but you have to do it properly,” Brueck said. “It’s a very good supplement for a retirement savings strategy.”

The PSCA survey showed that for the most part, HSAs are still being used as spending accounts rather than savings accounts. But more than a quarter of all employers are selling them as retirement savings vehicles.

“The uncertainty of future health care expenses is a significant concern for many,” Hattie Green, PSCA director of research and communication, said in a statement. “HSAs can be an important part of a holistic retirement savings approach to address those concerns.”

A Mercer survey earlier this year found that 38% of employees — particularly those under 45 — would find an employer match on an HSA contribution an attractive benefit. But there are still hurdles to overcome, such as confusion about how HSAs work, said Katie Hockenmaier, Mercer’s research director for defined contribution.

“Some employers have helped employees to [grasp] the benefit through easy-to-understand communications and have even helped encourage use through making employer contributions into HSAs,” Hockenmaier wrote in an email.

About 60% of respondents to the PSCA survey said that they offer investment options for HSA contributions. That’s a crucial part of the benefit, said Bryan Minogue, founder of Kardinal Financial.

“If it’s just sitting in cash, it’s not optimal,” Minogue said. If that’s the situation employees find themselves in, they may want to consider augmenting their employer’s HSA with another one that they set up on their own through a custodian.

An HSA is good third leg to the retirement savings stool, Minogue said, along with a 401(k) and an IRA.